NatWest 2024 Outlook: Fiscal / Monetary Policy On Different Trajectories

Identifying the key 2023 macro theme as having been "the speed and scope of global tightening cycles", NatWest sees the focus in 2024 shifting to "timing the transition from active to passive tightening and, ultimately, to interest rate cuts." They see "lower growth and quicker inflation convergence to target in G3 economies. As a result, we see scope for sooner and more aggressive easing cycles, particularly in the euro area and US."

• Fiscal risks: "fiscal policy is not expected to see the kind of normalization that we expect in the monetary policy cycle . .excessive, pro-cyclical deficits set to persist over the medium-term ... among the reasons why global easing cycles are likely to conclude with policy rates still well above pre-pandemic levels."
• Global: 2.0% GDP growth (below consensus), amid monetary policy lags and fiscal stimulus withdrawal - "might reasonably be deemed a ‘soft landing’ but we remain more concerned about the prospects for ‘take-off’."
• US: 1.0% GDP growth :"tailwinds that helped bolster the US economy in 2023 are expected to reverse in 2024. With growth poised to fall well short of policymakers’ expectations and inflation moving closer to target, we look for the Fed to aggressively start to cut rates by mid-year."
• Eurozone: 0.9% GDP growth. ECB to cut before Fed, but yield differentials to narrow as the year goes on.
• Japan: 0.9% GDP growth. "BoJ yield curve control to be phased out and ... the negative interest rate regime to end by April."
• China (4.5% GDP growth)/EM: "Historically high global rates and lower Chinese growth will test EM’s macro vulnerabilities, especially where debt levels (South Africa) and external deficits (Colombia) are weak. India and Mexico’s fundamentals are stronger, anchoring local assets."
• Rates: Thematic steepeners, given slowing growth/easing cycles, ongoing funding needs, QT policies.
• FX: "USD supported by relative policy in early 2024, but the USD loses that advantage quickly [in H2] as the Fed easing cycle materializes"
• Note: NatWest's outlook was published on Nov 16