The Global Economy: Soft Landing in Store—but Still a Landing

Despite a range of shocks, the global economy stayed resilient throughout 2023. What course will it take in 2024?

From raging inflation to geopolitics to bank failures, successive crises have buffeted the world’s economies, but they mostly remain on firm footing. As we enter 2024, powerful factors still support a soft landing. However, risks to a benign base case are tilting to the downside.

Slower Growth Likely Ahead, with Better Balance

We think the global economy still has enough momentum to keep a soft landing the most likely outcome, though a soft landing is still a landing. With fundamentals eroded and higher rates exerting mounting pressures, growth will likely slow significantly in 2024. That’s not necessarily bad news: slower growth should keep inflation receding, allowing central banks to start cutting rates. This path should gradually bring the global economy into better balance.

Consumer Strength Is Key to Economic Resilience

Robust consumer spending was key to economic resilience in 2023, particularly in the US. The labor market far exceeded our expectations in 2023, providing income that supported spending. Hiring was robust and wage growth comfortably beat inflation. Cracks began to show late in the year, so we don’t think spending in 2024 will be as strong. The pace of hiring has decelerated, job openings are down, unemployment claims rose, and surveys of businesses and consumers suggested that workers were finding it harder to secure new jobs. 

Still, those data only show cracks—overall, labor markets remain strong. Global unemployment rates are very low by historical standards and layoffs haven’t yet risen materially. We expect slower hiring to eventually transition into layoffs, but the labor market likely has enough forward momentum to carry consumers well into 2024, if not beyond. The key takeaway: a soft landing in the labor market will translate into a soft landing for the broader economy. 

It wasn’t the labor market alone that boosted consumption in 2023. Stockpiles of excess pandemic-era savings also cushioned the blow from higher inflation. Fiscal support in the US and Europe enabled most developed-market households to maintain their standard of living even as prices rose, especially once inflation cooled late in the year. Today, those extra savings seem to be depleted (Display), which will make navigating future shocks more challenging in 2024. It’s another reason we expect slower growth in the coming quarters.

Don’t Expect a Uniform Global Economy

Growth won’t be uniform across the globe, and we expect regional divergences to widen over the course of the coming year. 

European growth already looks weak, and some fiscal consolidation is likely—an added headwind for 2024. But inflation is cooling faster in Europe than in other developed regions, so the European Central Bank should be able to cut rates earlier than its peers (Display). A rapid monetary policy response to slower growth should limit the economic damage, making any recession fairly mild. The UK seems likely to be a few months behind Continental Europe on the path to lower rates. While fiscal consolidation and the delayed effects of high rates will suppress UK growth, we think disinflation has further to run before the Bank of England will consider rate cuts. 

Major Asian economies are off-cycle compared with the West. China’s delayed, gradual post-pandemic reopening ushered in weak growth and low inflation, so authorities will likely continue trying to stabilize growth with accommodative policy. In Japan, pandemic aftereffects suggest that positive inflation might finally be sustainable after two decades of persistent disinflation. We expect the Bank of Japan to be comfortable enough with the inflation outlook to start shifting to positive interest rates in 2024. 

Risks Are Rising—Monetary and Fiscal

While our base case is benign, the risks are tilted to the downside. The sizable, rapid rate hikes in the West increase the possibility of a sudden stop in financial markets or economies. Higher rates increase pressure on businesses that rely on loans or corporate debt markets to finance their operations. Over time, more and more businesses will have to refinance at higher rates, and some will be challenged. Households face more costly debt, too, notably through higher mortgage and credit card rates.

Unwanted consequences from a lack of fiscal discipline are another danger. The US seems particularly vulnerable. Its very high budget deficits are set to last for the next decade, and significant budget changes are highly unlikely in an election year (Display). If excess government bond supply pushes rates up sharply again, the economic and market outlook could worsen.

The risks to the global economy aren’t all to the downside. So far, inflation has cooled without hurting the labor market or broader economy. The “immaculate disinflation”—cooling inflation without spiking unemployment—so far suggests that the global inflation outbreak may have been almost entirely an artifact of the pandemic rather than an underlying economic imbalance. If so, inflation may continue to move lower without meaningful economic disruption. That outcome would be the best of both worlds: falling inflation and solid growth is a recipe for very strong market performance. 

Starting 2024 from a Strong Position

Although we think global economic risks are greater to the downside than to the upside, 2024 will undoubtedly bring unexpected developments. We were surprised by the resilience in 2023, and by how high that resilience pushed interest rates. We can’t tell what surprises 2024 will bring, but the global economy is starting from a fairly strong starting point. A soft landing would be a rare outcome based on history, but that seems to be the most likely path ahead.