Navigating uncertainty: economic forecasts and global dynamics in 2024

 

It is already November, the time of year when market economists embark on the annual ritual of forecasting macroeconomic indexes for the following year — an exercise fraught with uncertainty, at best.

Economic forecasts are based on several assumptions, which may or may not come to pass. Historically, the U.S. and Chinese economies, oil price dynamics, geopolitics and the foreign exchange market have been key external factors affecting Korea’s economy. Next year will be no exception, in our view, with added policy risks caused by the U.S. presidential election next year.

Given a lack of visibility on the U.S. economy, economists have been coming up with contingent scenarios for the next 12-18 months, allocating varying probabilities for strong growth, growth at trend, below-trend growth and a recession. Our bank’s central scenario assumes U.S. growth will decelerate to 1.1 percent by end-2024, primarily due to high interest rates and tightening credit conditions. However, we expect upside risks to persist, contingent on fiscal stimulus, growth in labor supply and/or an unforeseen AI-driven productivity surge. Conversely, any policy mistakes or geopolitical shocks could swiftly tip the scales toward a recessionary scenario, underscoring the delicate balancing act that U.S. policymakers must perform.

The value of the U.S. dollar will move along with these scenarios. Interestingly, the dollar tends to show strength in both scenarios — of a strong economy (on the back of productivity-driven strength) or a recession (due to a flight to safety). The U.S. Federal Reserve action, inflation dynamics and the unfolding political landscape will all play a pivotal role in determining U.S. economic prospects in 2024.

Meanwhile, China, which is Korea’s largest trading partner, is key to domestic growth. Despite China’s notable GDP growth of 4.9 percent in the third quarter of the year, there remain persistent concerns over a negative output gap. Disinflationary pressures and the widening output gap may necessitate further monetary policy easing by the country’s policymakers; analysts expect rate cuts and adjustments to the reserve requirement ratio (RRR) in the coming quarters. The Chinese government’s commitment to improving the business environment and attracting foreign investment signals a recognition of the need for a sustained economic recovery. However, structural issues and weak investor confidence pose formidable hurdles that may need help from conventional stimulus measures in order to overcome them.

Oil prices are the linchpin of Korea’s economy. Market forecasts of the 2024 Brent oil price average reflect the delicate tightrope between oil supply and demand. Despite the narrowing gaps in market surveys, concerns over tightening supply in 2024 persist. The interplay of global demand, non-OPEC supply and OPEC’s role in stabilizing prices will likely decide the oil price direction in the coming year. We forecast Brent at $98 per barrel, as we expect global demand to grow by 1.5 million barrels per day in 2024, with non-OPEC supply adding 0.88 million barrels per day. While we see a supply deficit in the first and second quarters of 2024, we project a mild surplus in the second half of 2024. We expect OPEC to continue to play a key role in stabilizing prices, and we expect a further tightening of supply in 2025.

The looming U.S. presidential election in 2024 is a wild card, likely reprising the Biden-Trump match-up of 2020. Tight polls and inconclusive data on the current frontrunner set the stage for a closely contested electoral battle.

The role of swing states and the U.S. Electoral College add a layer of complexity, leaving the outcome uncertain. The election outcome has implications for Korea’s economy. Following the 2020 U.S. presidential election, U.S. industrial policy veered towards protectionism; this drove Korea’s foreign direct investment into the U.S. and hindered its semiconductor trade flows to China, slowing Korea’s economic growth.

On the foreign exchange front, despite improvements in Korea’s external account in recent months, the Korean won’s underperformance underscores the challenges faced by high-beta currencies. The non-linear trajectory of the Korean won's recovery, coupled with potential shifts in tech exports and geopolitical risks, paints a complex picture. The currency is sensitive to global economic conditions, reflecting the impact of U.S. fiscal policy and geopolitical tensions in the Middle East. While we see room for the Korean won to appreciate on the back of improving semiconductor exports, global recessionary pressure may pose a depreciation risk in 2024.

We expect 2024 to continue to present considerable uncertainty for markets, including potential headwinds from a global recession, geopolitical tensions and unknown policy direction in the U.S. presidential election year. Therefore, while the human instinct tends towards ending the year on a high note with optimism about the year to come, we note that the current economic environment is not friendly and recommend caution.

Park Chong-hoon (ChongHoon.Park@sc.com) currently heads the Korea Research Team at Standard Chartered Korea. Before joining the bank, he worked as a senior research fellow and head of telecommunication policy at the Korea Information Society Development Institute (KISDI).