Where are the clouds on the horizon?
What should we keep an eye on in 2024?
This is the time of year when we are bombarded by predictions for the year ahead. Normally, I shy away from these because they tend to be sensationalised and lack real insight. More often than not, they simply recount the consensus view in a way that, if you have read one set, you will be familiar with most sets. This doesn’t mean that we are idle at this time of year. We do carry out a review of the year. We do ask ourselves where we had some insight and where we were completely wrong. This is quite a salutary lesson, and one that we are reluctant to engage in public. We also have to face the hard metrics of finance — if the portfolios are up, we got it right, if they are down, we need to try harder.
Despite all of this, we are asked by our clients and our correspondents to give some form of view for the year ahead. We have decided to engage with this activity, not to make predictions, but to simply list the issues ahead that we find interesting and to which we are paying attention. We could be completely wrong in our views, but that is something to discover in the year ahead. We try to avoid a probabilistic approach to our views because we try to focus on key uncertainties, which defy the attachment of probabilities and which can be rather vague at times. We have decided to identify five core uncertainties about the year ahead. The issues that we are following, but which have yet to enter into a wider public awareness.
The first issue that we are following, and which has yet to become mainstream, is the new geopolitics of energy. Despite what the eco-activists claim, the world is moving away from fossil fuels and towards renewable energy. For example, China has a reputation for coal fired power, but that is a view of the past rather than the present. In 2022, China increased it’s wind power capacity by the same amount as the whole of the US. In 2023, China aims to double the rate of increase in wind capacity. China is rapidly becoming a major green economy, which has yet to enter into the consciousness of the west. This green transition is likely to accelerate in the near future, and that has consequences for the use of resources.
Carbon based fuels and materials are central to the current production methods. As we move into the green transition, oil and gas will command less of a premium and the fundamentals of the green economy — copper, lithium, cobalt, etc. — will start to attract a greater premium. China currently dominates the supply of these key commodities, many of which are to be found in the central Eurasian landmass and Africa. This has two consequences of importance. First, it explains why the emerging bloc between China, Russia, and Iran has more to it than simple resistance to the US. Second, it raises the issue of American and European responses to this dominance. It could result in some form of confrontation. It could result in investment in alternative sources. Or it could result in in the development of resource saving technologies. It may very well result in a combination of all of these. Either way, it is likely that the strategic significance of the Middle East will lessen and that of Central Asia and Africa will increase. Some of this may manifest itself in 2024, but we see this as a slow burning fuse that is unlikely to have full effect much before 2030.
The second issue that we are watching is the squeeze on credit that started in 2022, continued throughout 2023, and is set to intensify in 2024. The monetary response to first the global financial crisis and then the pandemic was to flood the global system with liquidity. Quantitative easing (QE) was designed to supply ample amounts of credit to keep the global economy working. It achieved that aim. There was no depression style reduction in economic activity, and while the global economy remained sluggish, it continued to function. However, this came at a cost, and the price was a renewed general price inflation.
As central banks started to tackle the issue of inflation, we saw two responses — an increase in interest rates and the absorption of liquidity through quantitative tightening (QT). QT is QE in reverse. QE was a mechanism where freshly created money was used to buy debt instruments, usually government debt, to put liquidity into the banking system. QT is the reverse, where the central banks sell the debt back to the banking system and then writes off the liquidity received. In 2024, the Bank of England plans to undertake £100 billion of QT. This represents about 8% of GDP, which is rather a large amount of liquidity to remove. Globally, the amount of QT scheduled for 2024 will be in the order of $1 trillion. This is a large loss of liquidity at a time when the global economy is sluggish. There is a danger that public sector investment will crowd out the private sector, owing to the fiscal incontinence of governments. Either way, it does suggest that the conditions for lowering interest rates will be limited for 2024.
The third issue that we are watching is more specific to 2024. During the year, according to The Economist, the majority of humanity will be asked to cast a vote. Not all of the elections will be free and fair. The list of elections includes North Korea and Russia, where the outcomes can be reasonably guessed in advance. However, the list of elections also includes some interesting possibilities. The presidential election in Taiwan has the potential to disrupt the existing order and may strain US-China relations. The US elections has the possibility of a second Trump administration, an eventuality that we are already planning for. Arguably, a more intriguing set of elections for 2024 are those to the European Parliament. Could a populist Eurosceptic, anti-Brussels, caucus dominate the new Parliament? These are all intriguing possibilities, many of which won’t happen. However, there is the chance of a surprise result here and there, and that is definitely something to be aware of.
The fourth issue we are monitoring is what Foreign Affairs has dubbed ‘Homeland Economics’. This is a process of on-shoring and ‘friend-shoring’ global supply chains to reduce the strategic vulnerability of a nation. In many respects, it’s the process of globalisation in reverse. As economies start to decouple and preferential trading blocs start to emerge, the global economy will start to lose a degree of its dynamism. This is the result of political choices, and it is a policy often advanced by the more nationalistic politicians. It manifests itself in trade impediments, but can also be found in policies towards migration. The flow of people is already a major issue on Europe and North America — the main destinations of choice — and this is an issue that is likely to resonate in the elections mentioned above. To a certain extent, there is little that can be done to stem the flow of people northwards under present circumstances. One option would be to develop the points of origin, but that runs against the grain of policies towards homeland economics. Instead, the fortress economies will build physical walls to exclude those who want to gain access to a better lifestyle. A cycle of attempted exclusion and failure seems to be built into 2024.
The fifth, and final, issue that we are monitoring is what some call fiscal incontinence. This is the inability of governments in Europe and North America to trim their spending to meet the resources they have available. There are three core pressures that increase spending — the demographic of an ageing population, the state of the public finances, and climate change commitments. The pressure placed upon public spending by an ageing population — increased healthcare costs, the increased cost of adult social care, and the increased cost of public pensions — is well rehearsed. We are now seeing the size of the public debt putting pressure on public spending. As interest rates have risen, the cost of servicing the stock of public debt has risen significantly at the same time. For example, in 2024, the UK will spend more on debt servicing than it does on education. Debt servicing is starting to become a item in European and North American fiscal budgets. Added to this is the cost of climate commitments, many of which are unfunded, and we can see that the pressure on public spending is unlikely to lessen.
Weighed against this is the ability to raise tax revenues. The tax burden in a number of economies is currently higher than in recent times. The ability of governments to meet the pressure of increased spending from increased taxation has its limits. Like the dissolute nobility of old, governments have just borrowed more, adding to the already high stock of debt. At some point, the mountain of debt will tremble, and when it does, it could well destabilise the financial system. Inflation is chipping away at the stock of debt, but as the stock of debt grows faster than the rate of inflation, it will continue to increase in real terms. This may come to a head in 2024, but that isn’t likely. There are too many elections in 2024 for hard decisions to be made. Instead, the economy is likely to become more vulnerable and unstable as it is impacted by monetary contractions combined with fiscal expansions. We are watching the Forex and Bond markets for early signals of acute difficulties ahead. If an implosion happens, it will happen quickly.
Having outlined five areas of concern, it is also important to say that a lot of things could go right. We could see a return of growth to the global economy, which would ease many of the issues identified here. It could be that the weather is not as extreme in 2024 as it was in 2023. It could be that the price of a foreign misadventure becomes very high to the various actors on the world stage, thus advancing the cause of peace. All of these suggest that it is easy to think of the worst possible outcome, whilst we really expect something a little less dramatic.
We would like to wish out readers a Merry Christmas and a Happy New Year. We hope that we all have a great 2024, and thank our readers for their support in 2023.
© Stephen Aguilar-Millan 2023
