General Economic Overview – Quarter 1 2024
The record-breaking levels of equity markets have meant that investor confidence has returned this quarter, but there remains some caution because valuations are high and may have already taken all the positives for the year into account. Perhaps the subtle difference compared to recent quarters is that the focus has moved from interest rate cuts to earnings results, which have been very positive, especially in the US. It is perhaps a good sign that interest rates are losing their dominance over global markets as this has persisted for several years. That is not to say that the global economy has now entered a growth cycle, as there are a number of headwinds that could derail the current momentum.
Inflation, whilst seemingly heading downwards, has remained fairly static in recent months hovering around 4% in the UK (although recently dropping to 3.4%) and 3% in the US. The next stage of moving down to target will probably be the hardest as goods inflation has generally fallen whilst service inflation has remained sticky. Strong wage growth in the developed world has helped maintain consumer spending, even though savings made in the pandemic have largely been eroded. Central bank meeting minutes have been carefully analysed, with the acceptance that rate cuts are probably delayed until mid-year at the earliest. One factor for investors to consider is how sensitive the global economy remains to existing interest rates. The lagged effect of monetary policy is very difficult to judge for policymakers and the belief that they can get the timing of rate changes exactly right is probably unrealistic. The long and variable lags in monetary policy make forecasting future growth, or indeed recessions, difficult. This is part of the reason why central banks are being cautious about lowering rates too quickly. A counter to this is that there is less sensitivity to interest rates in the global economy than in the past, with overall private sector debt levels slightly lower than during previous periods when interest rates reached similar levels. Also, a substantial amount of existing mortgage debt has been financed at longer-term interest rates, particularly in the US. All of this makes it difficult to get monetary policy exactly right for the economic conditions.
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