The developed markets face risks of higher rates and below-average growth in 2024, and overall growth would fall from 3 per cent in 2023 to 2.5 per cent in 2024, according to Aviva Investors.
Aviva Investors believes that interest rates across the world’s major economies are on the verge of peaking, according to the firm’s latest quarterly House View.
The policy rate hikes by major central banks over the past 18 months have been robust, marking the most substantial tightening cycle since the 1970s. According to Aviva Investors, the consequences of the 2022 energy shock have largely subsided in the Eurozone and the UK, but the full effects of increased interest rates, which have been postponed by fixed-rate mortgages and termed-out corporate debt, will gradually manifest over the following 6 to 12 months.
A severe recession is not anticipated despite the fact that these consequences will have an influence on consumer spending, residential investments, and business investments.
Growth in the US is still above trend, and no recession is anticipated next year says Aviva Investors. Even though inflation has declined this year, actual interest rates may need to increase further because core inflation in the services sector is still high.
This will likely gradually reduce, bringing inflation close to central bank targets by the end of 2024. According to Aviva Investors, there could be upside risks in the coming six months due to expected increases in energy costs, steady wage growth, and stable or rising firm margins.
Aviva Investors head of investment strategy and chief economist Michael Grady says: “As we head into the final months of 2023, it would appear that we may be close to peak interest rates in the world’s major economies if we aren’t already there.
“Core inflation has come down over the last year, the 2022 energy crisis has largely worked its way through, and the most recent round of central bank meetings in September saw the Federal Reserve and the BoE pause their rate hiking. The market now seems to be concentrated on the idea of ‘higher for longer’, a theme that will likely play out across 2024.
“Over the coming months, the pass-through of changes in monetary policy to the real economy and inflation depends on many factors. Setting aside temporary price-level shocks, a period of below-trend economic growth is often required when following on from a period of restrictive monetary policy, to create economic slack and weigh down on inflationary pressures.”
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