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The Global Investment Outlook 2024 - RBC GAM Investment Strategy Committee
Progress against inflation has ignited both bonds and stocks as the need for additional tightening of monetary policy is removed.
While the threat of recession in early 2024 remains as the full force of prior rate hikes feeds through, the next cycle is moving into view. We believe that capital markets are transitioning to reflect a return to optimal inflation and firming growth later next year, and doing so with a backdrop of generally attractive valuation levels.
Economy avoids recession in 2023, but challenges still lie ahead for first half of 2024
While a recession has been avoided so far in 2023, the economy will likely slow through the first half of 2024 before recovering later in the year. Savings that were built up during the pandemic are being depleted, government spending is set to slow and geopolitical frictions are intense. The main headwind to the global economy, though, is that interest rates surged to their highest level in 16 years by mid- 2023 and, if they remain elevated, higher borrowing costs could discourage business and consumer spending while making debt-servicing more difficult. There are signs that economic data is now feeling the pressure of higher interest rates. Global trade is contracting, business expectations are soft, housing activity has plummeted and the labour market is starting to lose momentum, albeit gradually. Although pathways to an economic soft landing are evident and the odds of such an outcome are improving as inflation moderates, we continue to look for mild contraction in the U.S., Canada, the UK and eurozone during the first half of 2024.
We expect inflation to continue moderating
Inflation has fallen sharply from its multi-decade peak in the middle of 2022, and we see further scope for decline. The four original drivers of the inflation spike have all turned meaningfully. The commodity shock has faded, supply-chain bottlenecks have eased, central banks have pivoted from massive ease to restraint, and fiscal stimulus is significantly diminished. At its worst, high inflation was broad-based, with the majority of the spending basket rising at an unusual clip, but that breadth is now fading quickly. Goods inflation has vanished. Service-sector inflation remains elevated, but it too is past its peak and a weaker economy should provide further relief. Shelter costs, the biggest remaining inflation driver, are likely to soften, in part because home prices are forecast to decline and because the shelter component of CPI is lagged in a way that should capture weakness over the coming months. For all these reasons, we think that inflation can continue moving back toward the central bank’s 2% target, although it may not reach that level by the end of next year. Our inflation forecasts are modestly below the consensus.
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