Wage growth, logistics risks and the prospect of Donald Trump being elected US president will make 2024 a “complicated” year.
That’s according to Sree Kochugovindan, senior research economist at Abrdn, who gave an economic outlook presentation in Luxembourg City on 22 February 2024. Abrdn looks after £535bn (€626bn) in assets under management.
Wage growth
Salaries are “still too elevated” compared to target inflation rates in the Eurozone, UK and US. “Labour markets are cooling,” Kochugovindan said, “but wages are still growing at a rapid pace.” That puts policymakers in a difficult spot, as they try to determine how inflation will slow and when workers’ inflations expectations will dampen.
While labour markets remain “a sticky point”, the European Central Bank and Bank of England and Federal Reserve will be cautious, as they “don’t want to derail” the progress they’ve already made on fighting inflation.
Interest rates
Rates will come down later, but end up being lower than markets expect, Kochugovindan predicted. Central banks will start to lower rates in late Q2 in the UK and US, and “potentially a bit earlier” in the Eurozone. She pegged nominal rates, globally, averaging around 2% in 2028-2030.
Read also
Trump factor
There are dozens of elections around the world this year, but one overshadows them all. That is the US presidential election in November. It is “likely to be a close fight”, Kochugovindan stated. Looking at polling data in swing states, there is a fair “chance” that Republican candidate Donald Trump will win.
“Trump 2.0 could be very different from Trump 1.0,” in terms of trade and budget policies and his expressed desire to replace Jerome Powell as chair of the Federal Reserve.
Supply chain risk
Current global logistics disruptions are likely be short-term, Kochugovindan said. But that does not mean they are not making an impact, as they are increasing costs. Logistics risk “doesn’t derail but could delay” a reduction in inflation and in turn could “delay central bank” rate decisions.
However, Kochugovindan discounted the Red Sea disruptions caused by Houthi militants attacking ships transiting the Suez Canal during her presentation. This has caused shipping firms to divert vessels to the Cape of Good Hope, adding time, expense and staffing shortages to ship journeys. Otherwise, they face higher insurance premiums. But relatively speaking, it will have little impact on the global economy. Ship operators have so far been able to pass costs on to customers, she observed. Ships are not queuing to land at ports as they were during the pandemic, so supply chains are flowing.
At the same time, the Red Sea scores relatively low as a potential “maritime chokepoint” compared to the Asia-Pacific passages such as the Taiwan, Korea and Malacca straits.
Looking at the volume and value of trade, shipping infrastructure and the global value chain, potential problems in Asia would be “more disruptive than in the Red Sea,” Kochugovindan told Delano following the presentation. For example, if Beijing made a move on Taiwan.
Kochugovindan said the equation would shift if the Middle East conflict “spills over to the Strait of Hormuz,” which would impact oil and energy prices, particularly in Europe.