Changes in global economy make forecasting more difficult than ever
The structural changes underway in the global economy mean economic forecasting is even more difficult than ever, said Rupert Thompson, chief economist at Kingswood.
The political backdrop can also not be wholly ignored. Geopolitical tensions remain heightened and an escalation of the conflict in the Middle East is a clear risk. More than half of the world’s population also goes to the polls this year, Thompson added.
Over the course of 2023 investment markets had quite a volatile time, but Thompson noted that the year ended on a strong note with most markets posting significant gains over the year.
In sterling terms, global equities were up 15.7 per cent in 2023 and now back slightly above the peak at the end of 2021.
Fixed income also recovered some of the large losses sustained in 2022. US Treasuries returned 4.4 per cent last year, while UK gilts and corporate bonds gained 3.7 per cent and 9.7 per cent respectively.
Thompson added: “The strong market performance since October has been down to growing hopes that an economic soft landing is on the cards and interest rates will be cut considerably over the coming year.
“The key call now is whether these hopes are justified, or the market has got rather ahead of itself as it has done on occasion in the past.”
It is hoped that the continued fall in inflation means that central banks will be willing to cut rates to support growth if necessary, although the Bank of England and European Central Bank remain cautious, while the US Federal Reserve is less so.
Thompson said it remains "far from clear" how easy it would be to reduce inflation all the way down to the 2 per cent targeted by central banks.
Additionally, longer-term sources of inflation pressure include de-globalisation, de-carbonisation and ageing populations.
And if growth were to remain firm, "inflation could quite conceivably rear its ugly head again down the road. When push comes to shove, the authorities may well tolerate inflation remaining closer to 3 per cent, if a return to 2 per cent required a recession".
He added: “All said and done, despite the market gains already seen, the better economic outlook means there are still opportunities to exploit. This is true for both bonds and equities, particularly in the cheaper parts of these markets.
“We continue to believe diversification remains crucial in these unusually uncertain times.”
ima.jacksonobot@ft.com
