Navigating the complex and unpredictable landscape of 2024, this article provides a framework for economic predictions, and homes in on key themes shaping International Finance Centres and cross-border capital investment.
Geoff Cook (pictured above), chair of Mourant Consulting, and Jonathan Rigby (pictured below), global managing partner at Mourant, a law firm-led, professional services business, explore their anticipated themes for the year ahead.
Forecasting is risky; there is no perfect view of the future. As J K Galbraith famously said, "The only function of economic forecasting is to make astrology look respectable."
The themes in this article provide a framework for our thinking and point to matters that ought to be kept under review. The aim is not to focus so much on the future, but instead to tell us what we need to know to take meaningful action in the present.
The ballot box bonanza
In 2024, no fewer than 70 countries will experience some form of election, with over 40 nations holding national parliamentary votes. 2 billion voters will go to the polls.
The most important of these elections is the United States election, being held on 5November 2024. At this point, it looks to be set for a re-run of Biden versus Trump.
A second Biden term would see more of the same with a democrat-flavoured version of Made in America whilst seeking to lead Western alliance democracies' foreign policy agenda, with a particular focus on China.
Trump, on the other hand, would likely withdraw support for Ukraine, question the continuing relevance of NATO and introduce an immediate whole tariff of 10 per cent on all imports to the United States. A Trump administration could significantly affect global political, economic, and financial stability.
In May, 900 million voters in India will go to the polls, with Narendra Modi currently the favourite to be elected for a third term. He will continue to promote 'Make in India', an initiative based on four pillars identified to give boost to entrepreneurship in India, and 'Digital India', a flagship government programme with a vision to transform India into a digitally empowered society and knowledge economy.
Modi also hopes to be a beneficiary of the transfer of offshoring from China, actively encouraging Apple to increase its footprint and investment. Foxconn Technology, suppliers of Apple's iPhone, have already made a $1.5bn commitment.
In June, the EU will see elections for the European Parliament. The polls will coincide with changes in the EU Commission executive board, as the EU Council's leader, Charles Michel, has resigned early, and speculation arises as to whether Hungary's Victor Orban will assume the role, at least on an interim basis.
The EU faces many challenges, including an ageing population, economic slowdown, energy and food security issues, climate change, and the continuing challenge of the Ukraine-Russia conflict. EU Commission President Von der Leyen will stand for a second term. She will have the tricky task of maintaining relationships with the United States and China simultaneously, whilst looking to the East regarding EU expansion and Ukraine regarding border security.
The Taiwan election concluded in January. Lai Ching-Te of the pro-independence DPP was victorious, but his party lost its majority in the Yuan; Taiwan's parliament, and Beijing has expressed its disapproval. While open conflict with China looks unlikely, tensions will simmer, and China will not be deterred from its goal of re-assimilation at a future point.
Finally, in Russia, 108 million people are expected to have the opportunity to vote for a new president, although there is likely to be only one serious candidate.
It will be a year of 'democracy on trial' as the problematic problems in the United States, a very probable change of guard in Britain, and the apparent weakness of the coalition in Germany, all play out.
Bloc politics – choose your team
2024 will see the enlarged BRICS (an acronym for Brazil, Russia, India, China, and South Africa) emerge onto the geo-political scene, with the addition in January of Saudi Arabia, Egypt, the United Arab Emirates, Iran, and Ethiopia. China hopes this will give it more significant influence in global affairs, although it is again committed to continuing a positive relationship with the United States.
Even as the BRICS collective enlarges, it is not a serious rival for the G7 and Western alliance regarding economic significance. Still, as a group of commodity-rich nations, it will undoubtedly ignite new fears in the West over access to critical metals, minerals, and supply chains that lean on extraction. As others queue to join the BRICS, these concerns will build.
Given the presence of significant energy producers such as OPEC members Saudi Arabia and Russia, and the consumption capability of China, energy security will continue to be a focus. However, the near 60 per cent increase in US energy production over the last five years on the back of drilling technology advances will at least mitigate supply vulnerabilities.
Where have all the people gone?
Several years ago in this Global Perspectives blog, we identified the potential for the global impacts of demographic change. Two decades of globalisation have brought enormous gains to developed and developing markets in lower manufacturing costs, leading to super-low inflation. Now that globalisation is unwinding, the cost of business and labour is rising across the developed economies, igniting inflationary trends.
In this new world of people shortages and supply chain disruption, labour and trade unions will hold increased power with potentially adverse inflationary impacts. Just as the Western world benefitted from globalisation, it will suffer due to de-globalisation and a fracturing of global trade, especially in sensitive industries.
Inflation – Goldilocks is for fairy tales
Belief in central bank's ability to wrestle inflation to the floor has been boosted following the dramatic increases in bank base rates in 2022/23. This confidence is misplaced.
Inflation took off due to the build-up of excess savings during the pandemic and the overstimulation that followed, particularly in the US. The conflict in Ukraine and the disruption to global food and energy supplies exacerbated an already embedded trend.
In a world of ageing populations and fewer young people, inflation will re-emerge occasionally; it is certainly not beaten. Bring in food and energy insecurity, and labour supply constraints, and inflation will likely continue to be volatile. A return to the super-low inflation of the last two decades is most unlikely.
IOU – What happens when the music stops?
Attempts by the then UK Prime Minister, Liz Truss, and her Chancellor, Kwasi Kwarteng, to dramatically increase borrowing levels to fund tax cuts revealed a great deal about the vulnerabilities of governments who 'depend on the kindness of strangers' to sustain their public debt piles. The initiative ended very badly.
Since the financial crisis of 2008/9, unconventional monetary policy, adopted chiefly by independent central banks, saw interest rates held at record low levels. The quantitative easing that accompanied these low rates pumped large amounts of capital into markets, inflating asset prices to record levels. The re-emergence of inflation has seen interest rates rise rapidly, and the servicing costs on debt piles build up during the financial crisis, as well as the pandemic years increasing to unseen levels.
Markets are beginning to question the sustainability of such high debt levels. With many elections due worldwide in 2024, fears of populist politicians borrowing ever more significant sums to fund election trail promises are growing. With trillions of dollars needing refinancing and the US alone expected to issue a record $4trn in Treasuries, ‘depending on the kindness of strangers’ may no longer work.
AI – come the revolution
Developed economy surveys indicate that 80 per cent of firms plan to invest in or increase their commitment to AI. Google, Microsoft and Meta will battle to dominate the AI landscape, racing to incorporate generative AI into their platforms. The prize attached to market leader status is enormous. ChatGPT attracted 100 million subscribers just two months after its launch. AI has rapidly morphed into a multi-functional, text, image and video capability. Productivity gains will likely lag as it takes time for new technologies to mature and embed.
Still, there can be no doubt that the boost from this revolutionary technology will be huge.
AI is divided into two camps: the first hails AI as the world's saviour, the solution to turbocharging productivity and beating dreadful diseases, such as cancer and dementia. Some claim it will solve the climate challenge.
Others predict a doomsday scenario where AI will become more capable and advanced than human intelligence. Like Frankenstein's monster, it will outstrip the ability of its creators to control it. Others predict the military deployment of AI will trigger global instability and Armageddon scenarios.
The saviour camp has the upper hand for the moment, and the race to develop AI is in full flow. The moral arguments about how it can be controlled and made to serve society will be made and contested. Still, interestingly, the EU has stepped into the debate with the introduction of the AI Act regulation. Whether this tiger can be taken by the tail and tamed remains to be seen.
COP Out or In
COP28 concluded with two notable quotations: The first, "transitioning away from fossil fuels in a just and orderly way," was a significant change in language and tone. However, the fears and concerns of those most directly affected have not gone away, encapsulated in the alliance of small states' statement, "We will not go silently to watery graves."
The climate agenda will move to COP29 in Azerbaijan in November 2024. COP30 will follow in Brazil in November 2025. Interestingly, Lula da Silva, the president of Brazil, has rolled back his predecessor, Jair Bolsonaro's attempts to liberate exploitation of the Amazon and is likely to support climate change action.
The COP28 stocktake estimates that maintaining 1.5° will require a 43% cut in emissions by 2030, and with significant nations boosting their fossil fuel energy production in response to the Ukraine-Russia conflict, achieving these goals continues to be very challenging.
Rule makers rule - OK?
The world is becoming more complex and dangerous. The outcome of two world wars was the institution of the Bretton Woods Agreement, establishing the IMF and the World Bank, and shortly after, the United Nations and the OECD.
These have enabled global standard setting in many walks of life and facilitated balancing interests between developed and developing countries. They have become powerful enough to introduce initiatives such as the global minimum tax and, through the FATF, production and development of the rules to fight financial crime.
Will these institutions survive a world where international cooperation is in decline, and in the event they don't, who will ensure the generation of balance and fairness in the global system? IFCs have been ready adopters and good corporate citizens in complying with the standards generated by these fora, demonstrating their neighbourly credentials. This opportunity for engagement may change as we move through 2024 and beyond.
Private capital – moving into calmer waters
The turbulent events of 2023 are fading in the rear-view mirror. Year-end results shrugged off banking failures, bond market twists, and higher for longer interest rate predictions, giving way to speculation about the pace at which central banks would begin to cut rates in the context of falling inflation.
Exits, add-ons, and fundraising slowed in 2023, with interest rates still elevated. The cost of borrowing is still high, and the first half of 2024 will continue to be challenging.
That said, with the prospect of lower interest rates in the second half and the drive for liquidity by investors, the exit pipeline should begin to unwind, and fundraising conditions become more favourable as capital is recycled. Alternates will continue to provide enhanced returns and a diversification play for public market investors.
Of course, as Yogi Berra said, "It's tough to make predictions, especially about the future".
By Geoff Cook, chair of Mourant Consulting and Jonathan Rigby, global managing partner at Mourant
