Economic Outlook

The global economy is still in the slowdown phase of the economic cycle. While economic growth will slow further in the first half of 2024, a deep recession will be avoided.

The economic slowdown has lasted longer than expected without resulting in recession because of a strong labour market. Robust jobs growth, together with wage growth, have led to resilient consumption, helping the services sector support the broader economy.

However there are concerns that job markets in many countries may start to weaken over the coming months. Consumer spending could weaken should this happens. Particularly for countries such as the United Kingdom, Australia, New Zealand and Canada where mortgages are tied to floating rates, higher mortgage repayments would lead to lower household disposal income.

The economic outlook depends largely on central bank policy. If the US Federal Reserve (Fed) and its peers are too slow to acknowledge growth risks and maintain high interest rates for too long, the probability of a deeper economic slowdown could rise.

We expect central banks to cut interest rates from the middle of 2024 and for the economic slowdown to be gradual and orderly (Figure 2).

*F represents forecast data by UOB.
Source: Bloomberg, UOB Global Economics & Market Research (15 December 2023)

Inflation

Inflation has declined steadily from the middle of 2022 onwards. We expect price pressures to ease further this year due to high base effects, weakening demand due to a slowing economy and as the re-building of supply chains continues (Figure 3). Although housing inflation has stayed high, it is expected to decrease over the coming year as housing demand weakens and rental costs come down.

* F and dotted lines represent forecast data by UOB.
Source: UOB PFS Investment Strategists, UOB Global Economics & Market Research (15 December 2023)

Inflation expectations for the medium term are mostly steady. In addition, a better balance between demand and supply in the jobs market will help cool wage growth.

Food and energy prices are the most difficult parts of the inflation puzzle. Risks include the ongoing Russia-Ukraine and Israel-Hamas wars that can lead to major oil and food shortages if conflict worsens. Disruption to Red Sea shipping can also have direct impact on global supply chains. Oil prices are unlikely to rise much more if demand falls with slowing global growth, without any disruption to supply. Food prices are, however, also subject to climate change and the increasing occurrence of droughts and floods.

However, factors that could lead to sharp spikes in short-term food and energy prices are likely to be temporary. Instead, the broader trend will be a reduction of inflationary pressures even with consumer price growth remaining above pre-pandemic levels.

Central Bank Policies

Interest rates are currently high, but the global rate hike cycle is coming to an end because inflation is slowing and monetary policy is already tight. A change towards lowering rates from the middle of this year onwards is now more likely than before.

The Fed has indicated it is probably done with raising rates and expects to cut interest rates by 75 basis points (bps) through 2024 (Figure 4). The Fed’s change in policy will enable other central banks to do the same and focus on supporting economic growth.

Source: UOB PFS Investment Strategists, UOB Global Economics & Market Research (15 December 2023)

We expect the Fed to keep interest rates unchanged until the middle of 2024. Thereafter, we forecast the Fed to lower interest rates by 25bps each time in June 2024, 3Q 2024 and 4Q 2024.

The European Central Bank (ECB) has stopped raising interest rates but insists that interest rates need to remain high for longer as core inflation is still close to twice the 2% target. We forecast the ECB to keep interest rates unchanged for 1H 2024, before lowering them from 4Q 2024. However, as Eurozone headline consumer price index (CPI) has fallen rapidly, financing conditions are tight and recession risks are growing, the ECB may have to reduce interest rates sooner than expected.

However, there is a large gap between guidance given by developed market (DM) central banks and what the market expects. For example, the Fed is indicating 75bps of rate cuts and the ECB is insisting they are not thinking about policy easing right now, but the market is expecting around 150bps of rate cuts by both central banks in 2024. It is unclear how this difference will be settled. Will the market lower rate cut expectations? Or will central banks increase their rate cut outlook? Considering the orderly nature of the global growth slowdown, one could argue that the market is too hopeful with aggressive rate cut expectations.

In China, the People’s Bank of China (PBoC) might need to do more monetary easing given inherent weakness in the economy and weak price pressures. Aggressive rate cuts are however not expected as the PBoC seeks to maintain stability in the local currency.

In Japan, the Bank of Japan (BOJ) has been making small changes to its yield curve control policy since December 2022, gradual moves towards removing the framework completely. The BOJ indicated it will no longer cap 10-year Japanese government bond (JGB) yields at 1.00% anymore if bond yields match economic fundamentals and broader bond market movements.

Our view is for Japan to end its negative interest rate policy in April and stop yield curve control in June. However, the window of opportunity for such policy changes is narrow as the Japanese economy is fragile and global growth is slowing down. At the same time, other central banks may start to cut interest rates from the middle of 2024. Because of these reasons, the BOJ may find it increasingly difficult to raise interest rates as the year progresses.

Country Focus

United States
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The United States (US) economy will continue to slow in the coming months, but a recovery is likely in the latter half of the year when the US Federal Reserve (Fed) cuts interest rates to support economic activity. Overall growth for 2024 is expected to be positive.

The severity of the US economy’s slowdown in 1H 2024 is linked to inflation and the Fed’s policy path. If inflation falls towards the Fed’s 2% target and interest rates start to come down, economic slowdown will be orderly. Higher inflation, on the other hand, would force the Fed to maintain interest rates high for longer and increase the chance of a recession. This is because companies will reduce hiring and investments when interest rates are high.

We should also watch out for the risk that smaller regional US banks may face a crisis of confidence in their finances if bond yields rise sharply again, as well as problems in the US commercial property sector.

US households are less affected by high interest rates because they took advantage of lower rates during the pandemic to refinance their fixed-rate mortgages, but there are indications that household finances are becoming tight. The US economy relied on consumption in the past year, but this consumption power may not last.

Some factors that may lead to lower consumption are a US jobs market that is slowing down gradually as well as depleting US household excess savings. High inflation and interest rates will also pose challenges to private consumption, while the resumption of student-loan payments will also affect spending patterns. We have already seen signs that low-middle income US households have begun to purchase cheaper goods and increasingly use credit or buy-now-pay-later schemes. Moreover, US auto and credit card delinquencies have begun to rise.

These are reasons why we foresee weaker growth in the US for the upcoming months. If the Fed reacts by cutting interest rates from the middle of this year, economic slowdown will be contained.

The Eurozone economy is facing challenges as low domestic spending is hurting the services sector, while the manufacturing sector is suffering from low external demand and high borrowing costs.

We forecast the Eurozone economy will grow 0.8% this year, but there are increasing risks of a recession as most of the bloc’s economies are slowing down while its largest economy Germany has stopped growing.

The recession threat is due to the European Central Bank’s (ECB) 450 basis points (bps) of rate increases since July 2022. This helped control inflation, but it also caused the current economic weakness. Besides the steep rate increases, the ECB’s quantitative tightening also reduced the central bank’s balance sheet by almost EUR7 trillion in less than a year, while the ECB stopped its supply of low interest commercial bank loans.

According to the latest purchasing managers’ index (PMI), both manufacturing and services sectors in the Eurozone continue to contract. Furthermore, demand for corporate loans has fallen substantially while banks have made their credit standards stricter.

China’s economy underperformed in the past year, as consumer sentiment was affected by the loss of wealth from the housing market collapse and a weak stock market. Weak momentum in the Chinese economy is apparent from the fall in both consumer and producer prices. Business confidence was also reduced by sluggish domestic spending and low overseas demand.

In response, the Chinese government has unveiled a range of stimulus measures. Its main emphasis has been supporting the property sector, where confidence keeps falling with new-home prices dropping further while home sales shrink.

Apart from the real estate sector, there are indications that the Chinese economy may have reached its lowest point. However, a growth acceleration depends on improving consumer and business confidence, and this needs more policy support from Beijing. The central government may also need to provide more support to address local government debt issues.

Japan’s economy weakened sharply in 3Q 2023 and the outlook for the coming months is deteriorating.

As the global economy is likely to lose more momentum, Japan’s exports will face lower demand from abroad and this may lead to businesses reducing their spending on capital investments.

Additionally, domestic consumption may decline more as households reduce spending due to persistently higher inflation. While Japan has experienced higher wage growth, wage growth is still lower than inflation such that real wage growth has been negative since April 2022. This means that household purchasing power has decreased for a long time. Along with a shrinking and ageing population, this will lead to weaker domestic demand.

The Japanese government unveiled another economic stimulus package of more than JPY17 trillion to deal with the effects of high inflation on households. The package focuses on lowering income taxes and giving cash payments to households with low income. These measures can help the economy grow but will not completely boost consumer confidence unless inflation is controlled.

The main drivers of growth in 2024 will be household consumption and investment. Consumption will benefit from low inflation and increased spending during the election campaign. Political stability is anticipated during the 2024 election, with all presidential candidates agreeing on existing projects and the relocation of the new capital city. This agreement is anticipated to boost foreign interest in investing in Indonesia.

Despite higher food inflation fluctuations due to high rice prices amid supply disruptions, inflation has been well-controlled in 2023 and is expected to remain so in 2024. Nonetheless uncertainty and volatility in the path of inflation and currency market are reasons why we expect Bank Indonesia (BI) to keep interest rates unchanged at 6.00% throughout 2024.

The US Dollar (USD) is expected to decline as expectations of Fed rate cuts increase. With Indonesia’s interest rate gap relative to the Fed rate expected to widen, the yield gap is also expected to increase. This is likely to attract bond inflows into Indonesia and ultimately support Indonesian Rupiah (IDR) stability, with the IDR expected to reach 14,800 against the USD by the end of 2024.

Malaysia’s economy performed well in 2023 despite the influence of various global factors. For 2024, Malaysia’s growth outlook remains steady, backed by the moderate slowdown of the global economy, assurance of economic progress in a growth-oriented federal budget, supportive interest rate policy and resilient domestic spending. However, there are challenges from low external demand and increased costs.

The Overnight Policy Rate (OPR) is expected to stay the same as inflation in Malaysia is still mild compared to developed countries. However, we are mindful of geopolitical risks and unstable commodity prices. These factors along with tweaks to Malaysia’s government subsidies and progressive wage policy could possibly lead to higher inflation and interest rates.

The Malaysian Ringgit (MYR) in 2023 was affected by the same set of external challenges that also hit other Asian currencies, including expectations of higher-for-longer Fed rates, demand for safe-haven USD assets and China slowdown concerns. However, a recovery in the Chinese Yuan (CNY) as well as expectations for USD to weaken in 2024 are likely to boost MYR to 4.45 against the USD by the end of 2024.

Singapore’s economy is set to improve from the middle of 2024 onwards, as a recovery in the electronics cycle and external demand will boost manufacturing and trade. Gross Domestic Product (GDP) is projected to increase to 2.9% in 2024 from 0.9% in 2023. Both headline and core inflation are likely to decline due to lower global food prices and services inflation, as well as the continued appreciation of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) to control imported inflation.

However, the effect of the 1%-point increase in the Goods and Services Tax (GST), which took effect on 1 January 2024, is still uncertain and could keep core inflation above the long-term average of 1.8%. While a 50bps reduction in the slope of the S$NEER policy band is anticipated in 2Q 2024, a complete monetary policy change might be delayed to 2H 2024 due to the possible delayed impact on services inflation from wage hikes and increased business costs.

The expected weakness of the USD together with widespread recovery of Asian currencies may continue to support the Singapore Dollar (SGD), which is projected to strengthen gradually to 1.30 against the USD by the end of 2024.

With a new government and incoming consumption stimulus policy, Thailand’s economy is projected to grow by 3.6% in 2024. Growth drivers are expected to come from strong consumer spending and tourism, despite ongoing external challenges. Foreign risks, such as geopolitical conflict, should be watched closely.

Headline inflation has stayed below the Bank of Thailand’s (BOT) target band of 1.0-3.0% since March 2023, with the recent fall in prices driven by government subsidies for energy and electricity. We expect headline inflation to increase slightly to average 2.0% in 2024. The BOT is likely to keep interest rates at 2.50% for the whole year, although rate cuts are possible in 2H 2024 if the economic outlook deteriorates.

The Thai Baht (THB) may have passed its worst as it stands to gain from a recovering CNY starting from 1Q 2024. A rise in Chinese tourist arrivals following the launch of a new visa-free policy could further support the THB. The THB is expected to recover against the USD to 33.3 by the end of 2024.

Source: UOB Global Economics & Market Research (15 December 2023)

Asset Class Views

Historical data from the past 30 years show that most asset classes perform well a year after the US Federal Reserve (Fed) ceases to hike rates (Figure 6).

*One year average return, since 1989.
Source: JPMorgan Asset Management (30 November 2023)

Stocks

We hold a neutral view on stocks as an asset class. There are short-term risks for global stock markets in the first half of 2024, before the outlook improves in the second half when central banks cut interest rates. Figure 6 shows that stock markets historically generate positive returns in the year following the end of the Fed rate hike cycle.

Key factors that could determine stock market sentiment are inflation, economic growth, monetary policy and bond market movements.

To sum it up, global stock markets are vulnerable to selling pressure at the beginning of the year. This is because people are expecting aggressive rate cuts that central banks may not provide. Even if central banks start to cut rates, it may be due to a rapidly weakening economy which again may trouble global stock markets.

Geopolitical tensions also remain high. During this period, it is advisable to stay defensive in quality large-cap stocks as well as recession hedges such as stocks in the healthcare, utilities and consumer staples sectors. The other important strategy is to have a well-diversified portfolio.

Investing in quality dividend-paying stocks can also help. Although bonds and cash yield almost as much as stock dividends right now, bond yields and fixed deposit rates are expected to drop and income from high dividend-paying stocks will become more attractive.

When the outlook for both economic growth and central bank policy becomes clearer towards the middle of the year, stock markets are expected to stabilise.

We have a neutral outlook on US stock markets as an economic slowdown will challenge the strength of corporate earnings. Diversification and selection then become more important. During this time, defensive sectors like healthcare can help stabilise portfolios. Quality growth stocks as well as dividend stocks with steady cash flow and strong balance sheets are also expected to do better in this slowing growth environment. Semiconductor companies may benefit from a recovery in demand for tech hardware.

The increased risk of recession in many Eurozone economies is expected to hurt European stock markets. High interest rates will also reduce corporate profits, especially for small cap companies and cyclical sectors with shorter debt maturities like autos, airlines, communication services and industrials. Information technology companies with low refinancing risk and stable earnings have better chances of doing well, while diversified European banks, healthcare, utilities and consumer staples are more resilient. Quality dividend-paying stocks may also perform well.

Chinese stock markets did poorly last year and still face challenges this year. However, the Chinese economy may start to recover. Due to low valuations, there are some opportunities in Chinese tech stocks as well as stocks in the electric vehicle (EV), renewable energy and healthcare sectors. A flexible approach is recommended until business and consumer sentiment improves.

Japanese stocks rallied strongly last year but we are mindful of risks ahead. While corporate reforms are positive, stock valuations are no longer cheap. If the Bank of Japan (BOJ) ends its negative interest rate policy and yield curve control as anticipated, a surge in Japanese government bond (JGB) yields and the Japanese Yen (JPY) could hurt local stocks, particularly shares of export-reliant companies. Japanese bank shares could however benefit as a change in BOJ policy could result in higher net interest margins and therefore profits.

We are optimistic about Asia ex-Japan stocks. While China’s weak economy poses challenges in the near term, stocks in Asia ex-Japan offer appealing dividends and business activity is still resilient. Trade has also recently improved and countries like South Korea and Taiwan stand to benefit from a recovery in demand for tech hardware. These factors will help drive foreign capital inflows.

We are also positive on ASEAN stocks as we expect monetary policy to be supportive and exports to recover. Stock valuations are currently attractive.

Bonds

Bonds may experience short-term fluctuations, especially when investors manage strong rate cut expectations against policy guidance from central banks. In addition, the US government may keep issuing more long-term bonds to fund the US' growing budget deficit, while paying higher rates to renew its debt.

However, 2024 may turn out to be a good year for bonds as risk-adjusted returns for bonds are attractive given the view that both economic growth and inflation will keep slowing down. As central banks shift their focus towards cutting interest rates, bonds will benefit. Besides high coupons, potential gains in bond prices can add to bond total returns.

At current yields, bonds historically offer asymmetric total returns if interest rates rise or fall (Figure 7). If interest rates rise unexpectedly by 0.5% or 1.0%, total returns for bonds are largely positive. If interest rates are cut by 0.5% or 1.0%, bonds will do well.

Source: JPMorgan Asset Management (30 November 2023)

We have a positive outlook on investment grade bonds in both developed markets (DM) and emerging markets (EM). Investment grade bonds, especially those in developed markets, can hedge against economic slowdown, while paying income. Current yields of 5% to 8% are attractive compared to stock returns which can come with higher volatility.

For the short-term, bonds with low duration will benefit most as central banks stop raising rates and expectations grow over rate cuts from the middle of 2024. Bonds with long duration may underperform during this period as the US government will keep running a large budget deficit this year, leading to issuance of more long-dated bonds. As the year goes on, the environment should improve for long duration bonds when debt issuance concerns ease. The strategy would be to focus on shorter duration bonds now before gradually increasing duration to lock in high yields for longer.

We stay underweight on high-yield bonds as default rates may increase in a weakening growth environment.

Foreign Exchange and Commodities

Our view is for the US Dollar (USD) to weaken across 2024 as the US Federal Reserve (Fed) cuts interest rates. The USD will no longer benefit from a widening yield differential as US Treasury (UST) yields continue to fall. However, USD weakness will likely be gradual as the US economy is still expected to perform better than its European and Chinese peers.

We retain a positive outlook on crude oil prices, expecting Brent crude prices to recover to USD85 per barrel in 1H 2024. Geopolitical tensions remain elevated while OPEC+ nations may cut oil production output further.

We still see gold rising above USD2,000 and hitting USD2,100 in the second quarter. Gold is a safe haven asset when economic growth is weak and geopolitical tensions are high, both of which we are facing now. With central banks near the end of their rate hike cycle and possible rate cuts in 2024, demand for gold has risen. Investors are buying more gold as a portfolio hedge, while central banks have also been adding more gold to their reserves. With geopolitical tensions increasing and political risks emerging, the outlook for gold is positive.

Important notice and disclaimers
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The information contained in this publication is given on a general basis without obligation and is strictly for information purposes only. This publication is not intended to be, and should not be regarded as, an offer, recommendation, solicitation or advice to buy or sell any investment or insurance product and shall not be transmitted, disclosed, copied or relied upon by any person for whatever purpose. Any description of investment or insurance products, if any, is qualified in its entirety by the terms and conditions of the investment or insurance product and if applicable, the prospectus or constituting document of the investment or insurance product. Nothing in this publication constitutes accounting, legal, regulatory, tax, financial or other advice. If in doubt, you should consult your own professional advisers about issues discussed herein.

The information contained in this publication, including any data, projections and underlying assumptions, are based on certain assumptions, management forecasts and analysis of known information and reflects prevailing conditions as of the date of the publication, all of which are subject to change at any time without notice. Although every reasonable care has been taken to ensure the accuracy and objectivity of the information contained in this publication, United Overseas Bank Limited (“UOB”) and its employees make no representation or warranty of any kind, express, implied or statutory, and shall not be responsible or liable for its completeness or accuracy. As such, UOB and its employees accept no liability for any error, inaccuracy, omission or any consequence or any loss/damage howsoever suffered by any person, arising from any reliance by any person on the views expressed or information contained in this publication.

Any opinions, projections and other forward looking statements contained in this publication regarding future events or performance of, including but not limited to, countries, markets or companies are not necessarily indicative of, and may differ from actual events or results. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person. Investors may wish to seek advice from an independent financial advisor before investing in any investment or insurance product. Should you choose not to seek such advice, you should consider whether the investment or insurance product in question is suitable for you.

Managing Editor
  • Winston Lim, CFA
    Singapore and Regional Head,
    Deposits and Wealth Management
    Personal Financial Services
Editorial Team
  • Abel Lim
    Singapore Head,
    Wealth Management
    Advisory and Strategy
  • Michele Fong
    Head, Wealth Advisory and Communications
  • Tan Jian Hui
    Investment Strategist,
    Investment Strategy and Communications
  • Low Xian Li
    Investment Strategist,
    Investment Strategy and Communications
  • Zack Tang
    Investment Strategist,
    Investment Strategy and Communications
UOB Personal Financial Services Investment Committee
  • Singapore
    • Abel Lim
    • Ernest Low
    • Michele Fong
    • Tan Jian Hui
    • Low Xian Li
    • Zack Tang
    • Jonathan Conley
    • Alexandre Thoniel, CAIA
    • Chen Xuan Wei, CFA
    • Chia Hong Wei
    • Daphne Chan
    • Marcus Lee, CFTe, CMT
    • Ivan Hu
    • Chloe Kwan
  • Malaysia
    • Ryan Tan
    • Mow Wei Sern
  • Thailand
    • Suwiwan Hoysakul
    • Boonnisaed Thanyaworaanan
  • China
    • Huang Li Li
  • Indonesia
    • Diendy