The Year Ahead
Key questions
We expect the strength of the US economy in 2023 to give way to slower, though still positive, growth in 2024 as consumers face mounting headwinds. We expect European growth to remain subdued, and China to enter a “new normal” of lower, but potentially higher-quality, growth.
US
A long-awaited slowdown. US economic growth was more resilient than expected in 2023, with the support of excess consumer savings. In 2024, we think growth is likely to slow. High interest rates are likely to curb the propensity to spend: Items often purchased by borrowing, like houses and cars, are the least affordable they have been in years. Households are having to grapple with the end of childcare subsidies, the trimming of Medicaid rolls, and the resumption of student loan payments. And we think savings rates are likely to rise as confidence ebbs.
No significant contraction. While we expect a slowdown, we do not expect a significant contraction in activity. It would be historically unusual for the US economy to avoid a recession after a period of rate hikes, but we think there is cause for optimism this time. First, job security among the key spending group of middle-income households is likely to remain high. Second, we expect solid investment spending related to artificial intelligence, semiconductors, infrastructure, and green energy. Third, strong household and business balance sheets should mean a degree of resilience against negative shocks.
Europe
Some support.Real consumer incomes should rise because of falling inflation and a resilient labor market, and we expect those to translate into higher consumer spending. Households have already accumulated precautionary savings and reduced debt. Supportive fiscal policy, particularly in southern and eastern Europe, should also support growth, as funds from the NextGenerationEU fiscal plan drive investment in infrastructure and low carbon energy production.
Headwinds remain. We expect European growth to remain sluggish overall. Monetary policy will likely stay restrictive through next year, even after the three rates cuts we expect. Bank lending will likely be constrained by pressure on bank profitability, less generous support from the European Central Bank (ECB), and concern over remuneration of reserves. Subdued external demand and high energy costs are likely to weigh on exporters and manufacturers.
China
A new normal. We expect the Chinese economy to grow by 4.4% in 2024, below an estimated 5.2% in 2023, weighed down by muted consumption, slow external demand, and challenges in the property sector. Over the longer term, a shrinking labor force, structural limits to trade-driven growth, and a fragile geopolitical balance mean the era of over 6% annual growth for China is likely behind us.
Still a growth engine. A new normal for the Chinese economy is no reason to write it off, however. Beijing recently announced a CNY 1 trillion bond issuance program that could lift next year’s GDP growth by 0.4–0.8 percentage points, and this could foreshadow more policy action in 2024. Longer term, we expect consumer spending, leadership in the carbon transition, and industrial supply chain upgrades to provide durable and quality growth drivers.
Investment implications
Buy quality bonds. We think slower growth will lead to lower interest rate expectations, and lower yields, in 2024, making high-quality bonds an attractive investment opportunity.
Buy quality stocks. We expect equity markets to rise broadly, but particularly like quality companies, including those in the technology sector, with the potential to grow earnings against a backdrop of less robust economic activity.
For more, see Buy quality.
UBS real GDP growth forecasts
US
Eurozone
China
Can the Fed defy history and avoid causing a recession?
History suggests that aggressive monetary tightening often, but not always, leads to a recession.
Since 1971, there have been eight cycles of interest rate hikes before the current one in which the Federal Reserve raised rates by more than 200 basis points. A recession followed in five of those instances, including in all four when rates were hiked by 375bps or more. In two, 1983–84 and 1994–95, the Fed achieved a soft landing. The conditions that allowed this included future inflation expectations being well anchored, a tight labor market, and sizable household savings—three features that are present in today’s environment. The recession in 2020 was triggered by the coronavirus pandemic.
Our base case remains that the US will achieve a “soft-ish” landing in 2024, thanks to robust labor demand, solid investment spending, and strong consumer and business balance sheets.
We expect politics to play an outsize role in 2024. The US presidential election, the ongoing Israel-Hamas and Russia-Ukraine wars, and the rivalry between the US and China could all affect markets globally. Investors should prepare for bouts of politically driven volatility and consider hedges.
A new normal is coming into view for China. Constraints on old growth drivers and a new focus on higher-quality growth will likely temper its GDP growth toward a 4–4.5% pace over the next decade. For investors, this means a greater long-term focus on sectors aligned with the country’s efforts to boost its tech self-sufficiency, localize mass consumption, upgrade its high tech and industrial sectors, and lead the global green transition.
Generative artificial intelligence isn’t a new concept—the broad idea has been around since the 1960s, and the transformer architecture that makes it more effective was detailed in 2017. But the launch of ChatGPT has shown its potential impact when combined with a platform with strong consumer adoption. Currently, we see AI-related opportunities across a range of software, internet, and semiconductor stocks.
We expect central banks to commence rate-cutting cycles in 2024. In our view, government bond markets are overpricing the risk that high interest rates will represent the new normal, and we expect yields to fall in 2024.
Debt is likely to continue to rise, fixed income volatility is likely to be higher in the decade ahead, and we think it unlikely that rates and yields will return to pandemic-era lows. But we do not believe that rates or yields are now in a structural uptrend. Debt, demographic, and productivity trends, along with a gradual restoration of central bank credibility, mean we expect rates and yields to settle at lower levels than today’s.
Other chapters
This report has been prepared by UBS AG, UBS AG London Branch, UBS Switzerland AG, UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS AG Hong Kong Branch, and UBS SuMi TRUST Wealth Management Co., Ltd..
