Opening Bell – an excess of pessimism about the economy, though not in markets
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Opening Bell – an excess of pessimism about the economy, though not in markets

We expect 2024 to outperform the current pessimistic economic forecasts but struggle to beat the optimism priced into equity markets.

We believe that the US will be the first to put an official stamp on ‘immaculate disinflation’ by cutting rates. The UK and Europe are likely to wait for more proof that inflation has been defeated in the key area of wages. Forecasters seem to have pushed the slowdown we all expected last year into 2024 and I think that they’re too pessimistic. Falling inflation is delivering a virtuous circle of improving real incomes and interest rate cuts which will support economic growth.

 

The prospect of lower interest rates will make bonds attractive and improves the equity outlook. However, excessive pessimism in economic forecasts is not reflected in rallying markets, which are notably more optimistic. That leaves the biggest risk a short-term setback on disappointed investor expectations, if the good news on the economy and rate cuts takes longer to come through.

...but forecasts for 2024 look too low for everyone
Forecasts for 2024 for UK, US and Eurozone

Source: Columbia Threadneedle and Atlanta federal reserve, as at 22 December 2023

US rate cuts will be official recognition that ‘immaculate disinflation’ has occurred.

The US saw the surge of inflation first, but also its peak. We expect the Fed to be the first to acknowledge the success of the ‘immaculate disinflation’ by cutting interest rates early in 2024.

Growth in 2023 was sustained by consumers spending their ‘covid piggybanks’. US consumers won’t be able to dip into their savings in 2024 to the same extent, but their real incomes are recovering so they won’t have to.

 

A wage spiral operating in reverse is the key to both falling inflation and sustained growth. As inflation falls, this has translated into real income growth, but also into falling wage demands. This has been enabled by an easing of the labour market with employers no longer forced to pay more to stop losing staff to rivals.

 

Even before interest rate cuts, falling bond yields have translated to lower US mortgage rates and we are already seeing this feeding through into a stronger housing market. This is another factor which will support the US economy this year.

US firms no longer losing staff to higher paying rivals
Job Switcher and Job Stayer in US firms in the years 1998-2022

Source: Columbia Threadneedle and Atlanta federal reserve, as at 22 December 2023

UK is set to surprise on all fronts

After only narrowly avoiding recession in 2023 and with sticky inflation, the consensus for the UK economy is for little improvement in 2024. However, inflation has finally started falling rapidly, while Purchasing Manager Indices are now indicating an upturn in economic activity.

We believe that one-off factors held up inflation in 2023, from sterling weakness on import prices to the official figures not reflecting shop discounts. As these factors fall out of the calculation in 2024, inflation should surprise on the downside. That would allow the Bank of England to cut interest rates this year. Though the prospect of a Budget giveaway and another 10% hike in the minimum wage in the spring means that they are likely to wait for hard evidence of falling wage inflation before they make their move.

 

After a few terrible years, real incomes are rising in the UK. A virtuous wage spiral is set to play out in the UK as well, but with more oomph. The UK consumer increased savings even after lockdowns ended. With a boost from tax cuts in an election year, we expect consumer confidence and spending to rebound.

 

The shift to fixed-term mortgages means that the UK consumer also doesn’t need to wait for interest rate cuts: mortgage rates have already fallen. I used to think we’d see a 10% drop in house prices and we’ve done half of that – and I now think that’s it.

US saving less, UK saving more
US saving less, UK saving more

Source: Columbia Threadneedle and Bloomberg, as at 3 January 2024

Europe remains a laggard, but even it will see ‘immaculate disinflation’.

Almost everyone, myself included, expected aggressive monetary tightening to lead to significantly higher unemployment. But unemployment has remained very low and that is especially true in Europe by comparison with its historically high levels.

 

Despite this, European consumer confidence has improved to merely miserable, having been deeply depressed. This factor explains nearly all the difference between Europe and the US economic growth last year. The focus on Germany, which slipped into mild recession, hasn’t helped. But Germany isn’t the whole of Europe, Spain, for example has been a whole lot better.

 

Europe has seen a big fall in inflation. That means that real incomes are growing again. However, to convince the European Central Bank to cut rates, we need wage inflation to fall back significantly. All the signs are that wage negotiations will see much lower numbers this Spring. As a consequence, we expect Europe to outperform pessimistic expectations.

Wage growth accelerating in euro area
Wage growth accelerating in euro area

Estimates and forecasts are provided for illustrative purposes only.

They are not a guarantee of future performance and should not be relied upon for any investment decision. Estimates are based on assumptions and subject to change without notice.

Markets, especially equities, have discounted some of the expected improvements.

Immaculate disinflation, with no recession and interest rate cuts, is positive for equites. However, the US equity market managed to be both resilient, and then rally strongly in 2023 as the news improved. So valuations indicate that it is expensive. That won’t stop good news on interest rates and the economy driving it higher, but it does temper our enthusiasm, so we focus our overweights elsewhere.

 

Better valuations for the UK and Japanese markets, make them attractive, especially in Japan where we see catalysts in corporate governance improvements to unlock that value.

 

We like bonds, as inflation falls and interest rates are cut. Though fiscal imbalances are wide, we think that this is an issue for another cycle. Credit spreads for corporate bonds have tightened, but they could become more expensive still in a benign environment and will still benefit from the positive interest rate backdrop.

 

Gold should shine as interest rates fall. It has outperformed expectations since a significant chunk of Russia’s foreign currency reserves were locked up. If this prompts other central banks to build up the proportion of gold in their reserves, this could potentially be a significant long-term driver.

19 January 2024
Steven Bell
Steven Bell
Chief Economist, EMEA
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Opening Bell – an excess of pessimism about the economy, though not in markets

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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