Chief Economist's Corner: A challenging year lies ahead

As another year draws to a close, it’s time to take stock and look ahead. Let’s just get straight to the point: 2023 turned out to be just as exciting and dramatic as foreseen a year ago when the war in Ukraine, record-high inflation and renewed monetary policy tightening shook the foundation of the world economy.

But luckily we were spared any earth-shattering quakes. China’s quick reopening, consumers’ insatiable appetite for new experiences, rapidly declining inflation and a very strong labour market staved off the feared hard landing although interest rates rose to 15-year highs in the western world during 2023. In terms of growth the year actually turned out better than widely expected.

Looming uncertainties

But uncertainties still loom just under the surface. Most countries’ industrial sectors are ailing and will similarly to the rest of the economy feel the impact of the aggressive monetary policy tightening well into 2024. And although inflation has dropped quickly, the main reason is the dramatic plunge in energy prices since last year. Overall, consumer prices are still 10-15% higher in most countries than in the summer of 2022, and although wages are now increasing across the board, it will take some time before households’ purchasing power is fully restored. Meanwhile, there is even a risk that the rising wage costs will lead to new consumer price increases. These so-called second-round effects are the main reason why the central banks have not yet dared to declare victory over inflation, although the Fed is now hinting at interest rate cuts no less than three times during 2024.

Moreover, geopolitical tensions – which have increasingly characterised economic trends in recent years – have not eased. The war in Ukraine seems at a deadlock, and the war between Israel and Hamas could potentially escalate to a regional conflict. If so, this might impact supply chains and energy prices so severely that the ghost of inflation could quickly rear its head again and trigger major fluctuations in the financial markets.

In terms of world politics, 2024 could also be a landmark year, as it will bring presidential elections in the US as well as elections to the European Parliament. Who knows what will happen if Donald Trump moves back into the White House, or what the public opinion will be in Europe on major issues such as Ukraine, Gaza, the green transition and the EU budget once the composition of the European Parliament is known and a new leadership in place?

To this should be added the fact that the BRICS cooperation will be expanded with Iran, Syria, the United Arab Emirates, Egypt and Ethiopia at the beginning of the year. This will add another dimension to the BRICS countries’ growing economic and not least demographical importance in the game about the future global world order. Argentina, which was also among the candidate countries, withdrew its candidacy after parliamentary elections in November, which brought right-wing nationalist Javier Milei to power.

Climate in focus

The climate is also undergoing (far too) rapid changes. 2023 proved to be the hottest year on record ever worldwide, and with the prospect of the weather phenomenon El Nino not ending until May at the earliest, there is a risk that this record might be broken as early as next year. So it was good news that the outcome of COP28 for the first time recognises the need to move away from fossil fuels in order to achieve net-zero emissions by 2050. Even though an action plan was not presented for how to achieve this goal – or finance it for that matter. But there is no doubt at all that the fight against climate change will also be an overriding theme in the new year.

It’s a universal truth that it’s difficult to predict the future. My best guess is that 2024 will be very challenging and that developments in the first six months will be defining for Europe, which is on the brink of recession. Still, if interest rates have really peaked and inflation remains subdued, I think that a soft landing – without a plunge in GDP and steep rise in unemployment – is the most likely scenario. If so, there is even a good chance that the economies could resume a stronger growth pattern towards the end of the year. At that time stronger purchasing power could thus lead to a renewed pick-up in consumer spending just as the expected large investments in the green and digital transition as well as increased defence spending would be able to stimulate the overall economy.

Happy Holidays!

Find out more about Nordea's Economic Outlook, including projections and analysis for the Nordic and global economies and markets.