Outlook 2024: Is the US on track for recovery?

As inflation is brought back under control, the Fed is expected to drastically cut interest rates in 2024. Yet with a looming presidential election, continued geopolitical turmoil and evolving consumer habits high on the agenda, uncertainty looks set to prevail.  

portrait of Christopher Hodge

“We believe the Fed will be aggressive in cutting rates next year, with the first cuts coming in May, and then every month after that for a total of 150bps in 2024.”

Christopher Hodge, Chief Economist for the US

2023 saw record interest rate hikes from central banks globally in a bid to combat rising inflation. The US was no exception, undertaking its largest rate increase in over 40 years. With inflation now back under control, 2024 is set to be a year of cuts, and the Fed expected to begin lowering rates as early as Q2 next year. In tandem, GDP is expected to slow, with the dollar likely to continue falling against major currencies throughout the year.

Meanwhile, geopolitical tensions show no signs of easing up and instability is set to continue in the coming year. Coupled with an impending presidential election, the market will not be immune to shocks, and we could see further volatility on the horizon.

Election could upset the market

Tensions are already mounting as the US gears up for its next presidential election. Another Trump presidency could see a range of reforms that could alter the trajectory of US economic recovery. Natixis CIB anticipates three likely outcomes: extended tax cuts; increased trade tariffs; and an end to capital boosting efforts introduced by the Fed.

Most notably, we anticipate that a return to the White House would see Trump extend the 2017 Tax Cuts and Job Act, which is currently set to expire in 2025. While such a decision would boost growth, it would likely cost around US$3.5 trillion over the next eight years –exerting considerable pressure on the US debt to GDP ratio.

In addition, Trump has proposed the introduction of a 10% tariff on all goods coming into the US in order to boost domestic production and manufacturing. This more hawkish approach to trade could exacerbate tensions and increase fragmentation. Finally, we expect to see a retraction of efforts introduced to boost capital for banks under a Trump government.

GDP growth to slow as consumer spending falls

Natixis CIB expects GDP growth to halve in 2024 to about 1.2%. This is largely down to an expected slowdown in consumer spending, with excess savings continuing to fall.

Since the pandemic, the US has added over three million jobs to its economy. Continued wage growth, as well as government subsidies such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan, saw excess savings grow to record levels. We estimate that total excess savings above trend reached a massive US$2.1 trillion, with consumption rebounding to pre-pandemic levels in H1 2022.

Since this time, we have seen real consumption above trend, while income has sat below trend. As such, as of November 2023, we estimate that total excess savings have already eroded by US$1.8 trillion. We see this trend continuing until Q2 2024, with consumers relying increasingly on credit and spending declining.

Alongside this trend, we expect to see unemployment rising throughout 2024, reaching 4.6% by the end of the year. This is in part due to the increased stress small businesses are under: while large banks have stayed afloat amidst escalating interest rates, regional banks – the primary credit providers to small businesses – have been harder hit, with profits down 20% year-on-year in Q3 2023.

Does de-dollarisation pose a legitimate threat?

The dollar has continued to decline in recent months, and we expect this trend to continue into 2024. Indeed, as the Fed cuts interest rates, the dollar is expected to fall against most currencies, while a slowdown in growth will cause further damage.

Meanwhile, against a backdrop of growing trade and ongoing geopolitical tension, there is increasing political desire to break away from the dollar. In particular, since the outbreak of the war in Ukraine, there have been many discussions regarding the currency’s weaponisation – with many disputing the power it gives the US to impose sanctions.

Leading the current push away from the dollar is China, which is presenting its own currency as an alternative – particularly for oil and gas imports. Other emerging countries are also keen to move away from the dollar, with China, India, Russia, Brazil, Turkey, Saudi Arabia and parts of Latin America all looking to denominate a growing proportion of their trade in yuan.

Russia now also systematically uses the yuan in export contracts – denominating 15% of its exports in yuan compared to just 1% before the war. What’s more, Argentina has announced it will repay part of its debt in the Chinese currency and Pakistan recently denominated oil import contracts in yuan.

Of course, while the dollar will be weaker moving forward, that does not mean to say it will be disappearing any time soon. When we look at the fundamentals, the US currency still represents nearly 60% of foreign exchange reserves and accounts for 88% of transactions.

Looking ahead, uncertainty looks set to prevail in 2024. While a drop in interest rates is firmly on the agenda, the outcome of the upcoming election and a constantly evolving political landscape will likely bring further surprises.

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