The year that is about to end has been difficult in the West as major central banks tightened monetary policy much more than previously expected in the light of rampant and quite stubborn inflation.
Interestingly, though, the impact of such tight monetary policy on growth has been muted, with both the US and the eurozone avoiding recession, especially the former.
In Asia, China underperformed, growth-wise, compared with the very bright expectations stemming from an exit from the Covid-19 pandemic. Many Asian economies, though, overperformed, such as India but even Japan.
Beyond the short-term developments, 2023 has been a very important year in terms of increased fragmentation in the global economy. The US has drastically reduced its imports from China and foreign direct investment into China has decelerated, even sharply shrinking in October.
Another interesting divergence in the global economy regards inflation. While the West suffered from very high inflation in 2023, Asia’s inflation has remained much more in control. The extreme case is China, which is ending the year with deflation on consumer and, much more so, wholesale prices.
This, together with capital controls, has allowed the People’s Bank of China to follow its own needs in terms of its monetary-policy cycle, with interest-rate small cuts rather than increases as in the rest of the world.
The very different inflation environment could also push fragmentation, as China is gaining competitiveness both in terms of prices but also a weak exchange rate.
In 2024 the scenario is likely to be very different, as disinflation forces in the West have been in place for a few months and are bound to continue so that both the US and the eurozone should reach their inflation objectives by the end of 2023.
This means that the US Federal Reserve and the European Central Bank should have the necessary room to cut interest rates quite rapidly, possibly 150 basis points for the first quarter and 125 basis points for the second.
The reduction in funding costs should help avoid a hard landing but also the restoration of purchasing power by households, which should see their real disposable income rise as inflation falls.
At the same time, the Chinese economy will continue to decelerate from about 5.2% growth in 2003 to 4.5%, on the back or limited fiscal and monetary support. India, on the other hand, will continue to shine with 7% growth in 2024, an important election year for the country. This means that the reshuffling of the supply chain away from China and toward other high-growth countries, especially India, is bound to continue.
Still, China’s regained competitiveness through deflation and a depreciated renminbi, along with industrial policy and innovation, should be positive in terms of moving up the ladder and becoming a very strong industrial power. This in itself might create additional waves of trade fragmentation as countries react to an influx of Chinese products, very likely through protectionism.
All in all, 2024 will be a year when central-bank key policy rates will start to subside thanks to lower inflation. Gains in real income, among other factors, should lead to a soft landing in the US and the eurozone, while China continues to decelerate, though still contributing relevantly to global growth.
Beyond such general macro developments, other important trends are taking place, pushing toward fragmentation of trade and investment. Geopolitics is behind this trend, but it is not the only factor. The reality is that supply-chain reshuffling is happening, even if for different reasons and at different speeds.
Finally, this rather positive scenario is subject to several risks, starting from geopolitics. Good examples are elections in the US as well as Taiwan but also complications in the ongoing wars in Ukraine and Gaza.
Alicia Garcia Herrero is chief economist for Asia-Pacific at Natixis and senior research fellow at Bruegel.
Let’s say my income is x. Prices rise leaving me with a shortfall of disposable income in the sense that it take more money to gain less.
Prices rise again to y but my income stays unchanged. Now I have even less disposable income.
Finally, prices stop rising a z. Now my disposable income remains unchanged if my income has not increased. However prices remain static at z. How does this leave me with a sudden increase in disposable income if my income continues to be unchanged?
Even if prices fall all the way back to x, I still haven’t seen any increase in disposable income from my starting point. The losses incurred in the course of the price rise are no longer increasing but I am only back at my starting point, not further ahead. In fact, I am likely worse off because I incurred debt or reduced savings to sustain myself during the period of disastrous price rise.