Scenario analysis: How will the global economy land this year?
Around this time a year ago, about 85% of economists and market analysts, including me, expected that the US and global economy would suffer a recession. Falling but still-sticky inflation suggested that monetary policy would grow tighter before rapidly easing once the recession hit; stock markets would fall, and bond yields would remain high. Instead, the opposite mostly happened.
Inflation fell more than expected, a recession was avoided, stock markets rose and bond yields fell after going higher. One therefore must approach any 2024 forecast with humility. Still, the basic task is the same: start with a baseline, an upside, and a downside scenario, and then assign time-varying probabilities to each.
The current baseline for many—though not all—economists and analysts is a soft landing: Advanced economies, starting with the US, avoid a recession, but growth is below potential and inflation continues to fall toward the 2% target by 2025, while central banks may start to cut policy rates in the first or second quarter of this year. This scenario would be the best one for equity and bond markets, which have already started to rally in expectation of it. An upside scenario is one with ‘no landing’: growth, at least in the US, remains above potential, and inflation falls less than markets and the US Federal Reserve anticipate.
Rate cuts would occur later and at a slower pace than what the Fed, other central banks and markets are currently expecting. Paradoxically, a no-landing scenario would be bad for stock and bond markets despite surprisingly stronger growth, because it implies that interest rates will remain somewhat higher for longer. A modest downside scenario is a bumpy landing with a short, shallow recession that
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