Much progress has been made. Inflation risks have eased, with core measures annualising nearer central bank targets. There are clearer signs global growth will be slower in 2024, led by a less buoyant consumer confronted by a less favourable jobs market. For most central banks, the peak in rates is in. Yet, more time is needed to ensure residual inflation risks, mainly in services, can be abated through 2024. Global (and US) growth now appears less likely to collapse, making the task of returning to a low inflation environment a little more challenging, particularly given the less disinflationary medium-term backdrop.

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Looking beyond ‘higher for longer’

When we first flagged a ‘higher-for-longer’ theme in mid-2023, it was less of a consensus view than it is now. In 2023, the combination of structurally tight jobs markets and excess post-pandemic cash has helped to mute the impact of 2022’s rapid hikes in interest rates. Together with structural ‘re-inflation’ forces (including ageing, elevated geo-political volatility, and shifting global supply chains), central banks are likely to need to hold policy tighter for longer to avoid the mistakes of the 1970-80s. This is likely to see policy rates in the US, Australia, the UK, and Europe being held in restrictive territory until mid-2024.

But in positioning portfolios for 2024—and regarding what we believe to be the main game—we need to look beyond the ‘higher-for-longer’ theme, which is likely to dominate in early 2024. The final months of 2023 have furnished clearer evidence that the global economy is slowing, and inflation is moving gradually lower. As the chart below shows, the Organization for Economic Cooperation and Development (OECD) expects growth to slow further from 3.0% in 2023 to 2.7% in 2024. UBS, who similarly forecasts 2.6% for 2024, views recent data as flagging a meaningful further slowing of growth into mid-2024 from around 3% to 2%, ahead of a patchy recovery through 2025.

‍

Looking beyond ‘higher for longer’

When we first flagged a ‘higher-for-longer’ theme in mid-2023, it was less of a consensus view than it is now. In 2023, the combination of structurally tight jobs markets and excess post-pandemic cash has helped to mute the impact of 2022’s rapid hikes in interest rates. Together with structural ‘re-inflation’ forces (including ageing, elevated geo-political volatility, and shifting global supply chains), central banks are likely to need to hold policy tighter for longer to avoid the mistakes of the 1970-80s. This is likely to see policy rates in the US, Australia, the UK, and Europe being held in restrictive territory until mid-2024.

But in positioning portfolios for 2024—and regarding what we believe to be the main game—we need to look beyond the ‘higher-for-longer’ theme, which is likely to dominate in early 2024. The final months of 2023 have furnished clearer evidence that the global economy is slowing, and inflation is moving gradually lower. As the chart below shows, the Organization for Economic Cooperation and Development (OECD) expects growth to slow further from 3.0% in 2023 to 2.7% in 2024. UBS, who similarly forecasts 2.6% for 2024, views recent data as flagging a meaningful further slowing of growth into mid-2024 from around 3% to 2%, ahead of a patchy recovery through 2025.

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