Navigating 2024 with your 3D glasses on

It’s that time of year again when economists set out their views of what to expect over the coming twelve months. Most of 2023 has been focused on recession risks, the outlook for inflation and the associated implications for monetary policy. But we haven’t been fixed on these issues exclusively. It’s been a year of wild reversals in markets: bonds got burned and then rallied, stocks were cratered and then soared, and the all-powerful King Dollar of the first half erased all its gains in the second half.

Traders and investors were buffeted by a succession of shocks: a US regional banking crisis and the collapse of Credit Suisse, the failure of China’s long-awaited economic rebound from Covid, the outbreak of a war between Israel and Hamas, and finally the Federal Reserve’s about-face to turn dovish.

As we enter a new year, here are four pieces concentrating on what we think were the major themes of the year:

A new era of higher rates, sticky inflation, tricky policy

One of the key challenges facing central banks is knowing how much monetary tightening is enough. A large part of the answer depends on what has happened to the neutral real interest rate–a useful analytical concept, but something that is extremely difficult to observe in real time. Sticky inflation is another important factor to consider. However, this won’t prevent central banks, especially in developed economies, from being able to loosen policy in 2024, but it does mean that we’ve entered a period of higher interest rates following the years of ultra-loose policy in the 2010s.

US-China great power competition

The period of hyper-globalization that turbocharged global growth between 1990 and 2020 may be over, but that doesn’t mean the world is deglobalizing. Instead, we think the global economy is fracturing into two blocs – one that aligns primarily with the US and another that aligns with China. This shift is at the root of wide-ranging changes in the structure of global economic and financial relationships.

Go green or no home

Move toward green and sustainable energy transition will be an important piece of collective efforts that will resonate across all geography and sector. The green transition has seen progress but not without pain. There are lot of opportunities existing both domestically and globally. US for instance plan to spend more than $500 billion over a decade under three laws.

This will create multiplier effect that will propel economic activities. Domestically, we have New Energy Transition Roadmap (NETR) which involved RM240 billion investment in the next 7 years.

Malaysia, play for progress

We are optimistic about Malaysia’s growth trajectory with its enhanced policy frameworks amidst various policy announcements in recent months. 2024 is the year of deliverables.

Concern about the feasibility of certain ambitious targets and the necessity for greater clarity and political commitment are the key success factors for the implementation.

Political stability, rebound in external demand, stronger Ringgit, higher commodity prices will be some of the potential catalysts for 2024.   

Additionally, here are some of the big questions for 2024 that can sway our calls in favour or otherwise:

Flashpoints: Are we really set for a “soft landing” and has inflation truly vanquished? How will elections impact markets? Could global geopolitical relations deteriorate further? And how will markets respond to all those risks?

Fed: When will Fed start to cut? And by how much?

US politics: Will Trump make a comeback? If yes, what are the geopolitical, macro and market implications?

Dollar: Is the US currency going to extend its recent weakness as the Fed moves toward cutting rates, or bounce back as the world’s largest economy outpaces its rivals?

Yen: Will Japan’s currency finally rebound as the central bank decides to bite the bullet and abandon the world’s last negative-rate regime?

Ringgit: Can Ringgit reverse its course? Will favourable domestic factors support Ringgit in 2024?

Oil: What will happen to crude as wars reshape supply lines, OPEC+ pledges to reduce output and demand weakens from the world’s biggest energy importer China?

We will discuss these questions above and more in our upcoming pieces.

Happy New Year!