Quarterly Investment Outlook – Q4 2024

We have reached the tipping point, where central banks are less mindful about inflation and concentrate more on tepid growth conditions. Overall, economic growth is slowing in the second half of the year due to two fundamental reasons: the effects from previous rate hikes and generally tighter monetary conditions, and the Chinese economic slowdown. Manufacturing in most developed countries is stagnating, as external demand is weak. The services sector has been steadily expanding, but in the last few months the expansion momentum has been waning. 

Having said that, overall economic conditions are positive, and the threat of a recession in major markets has been steadily receding. The IMF world output to grow by 3.2% in 2024 and 3.3% in 2025. Like market conditions, economic performance diverges. Market consensus expects 2.6% annual growth in the US (but only 2.4% and 2% respectively in the last two quarters of the year). Significant fiscal stimulus from the US government (fiscal deficit of 7.7% of GDP), and dollar weakness in the past few months both contribute towards more robust economic growth. Conversely, the Eurozone is expected to grow by 0.8% in 2024, and the UK by 1.1%. Inflation conditions have been broadly improving with developed markets aligning just north of their 2% target, at 2.2% to 2.5%. Having said that, inflation for different parts of the economy diverges significantly. Goods inflation has been steadily dropping, which is mostly attributed to weak demand and cheap supply of goods from China. On the other hand, services inflation remains around 4%-5.5% in developed markets, against an average of about 3%. 

Employment conditions remained broadly good, despite a slight pick up in unemployment rates versus 2023. Having said that, the gap between the demand of skilled workers and the supply of certain skills, remains quite high, fuelling persistent labour market imbalances which can often translate into higher service inflation. In this environment, central banks have become overall more comfortable with inflation and are turning their attention to growth. The ECB and the Fed have already cut rates by 0.5% and the BoE by 0.25%. At the time of writing, markets broadly expected rate cuts by 0.5% from all three central banks by the end of the year.