AgendaThings are improving, despite the noise.

Things are improving, despite the noise.

Words: Kevin Boscher


Kevin Boscher from Ravenscroft discusses the global macro outlook and how Jersey’s economy stands to benefit.

As 2024 draws to a close, it looks increasingly likely that major economies will avoid recession and, as inflationary pressure continues to ease and central banks embark on rate cutting cycles, this positive outlook extends to Jersey. The economic disruptions since 2020, including the pandemic and the Russian invasion of Ukraine, have been unprecedented and has dramatically disrupted the normal functioning of economic, geopolitical and financial forces. Whilst the global economic environment is gradually stabilising, it is evident that some things will be very different. In the US, economic activity remains strong, driven by robust consumer spending and a free-spending government willing to run large deficits. Unless the Federal Reserve makes a significant policy error or a new economic shock emerges, the US should enjoy a soft landing.

Importantly, the inflation outlook in the US and elsewhere continues to improve, even if it is struggling to return to the 2% target. This is being driven by the normalisation of pandemic and war-related disruptions, improved goods and labour supply, and lower energy prices. The Fed has shifted its focus from fighting inflation to supporting employment and the economy, recognising that households are focused on re-building their savings due to concerns over a softer employment market and increased living costs.

The growth and inflation story in the UK and Europe is similar. Growth and employment are stable but easing inflation pressures and a softer global economy have encouraged the European Central Bank and Bank of England to reduce interest rates, with further cuts anticipated.

Meanwhile, China continues to face cyclical and structural growth weakness due to a shrinking workforce, falling property prices and declining productivity growth. However, the combination of rate cuts and further policy stimulus from China should lead to an improving global growth outlook as we move into 2025.   

Looking ahead, a key question for investors is whether the global economy is transitioning back towards disinflationary forces that prevailed prior to the pandemic (what we would refer to as ’Ice’) or to a period of higher inflation, similar to the 70s and early 80s (what we refer to as ‘Fire’). It is possible to make a strong case either way but the truth is that nobody knows. Arguments for the ‘Ice’ scenario include an ageing demographic, continued technological innovation, and a global excess of savings. On the other hand, the ‘Fire’ scenario is supported by demographic-related wage pressures and the need for governments to run larger fiscal deficits to address challenges such as energy and food security, climate change and income inequality. 

This presents a challenge for central banks given the record levels of debt in global and individual economies. There is a natural ceiling for interest rates – going beyond this risks causing a debt deflationary or inflationary bust. We saw evidence of this with the UK pension crisis in September 2022 and US regional banks in 2023. Given this, central banks may need to keep interest rates lower than the macro backdrop would naturally dictate, adding to inflationary pressure.

One potential solution might be for central banks (and governments) to target stronger nominal growth through a higher inflation target. This could help governments tackle these challenges, boost long-term growth potential, ease income and wealth inequality and lessen the risk of deflation. Another helpful development would be a new cycle of capital investment by business and we appear to be in the early stages of such a trend in the US and elsewhere, which would boost productivity and long-term growth. 

In summary, inflation is moving closer to central bank targets, economies are slowly expanding and central banks have started cutting rates. However, risks remain, including an escalation in geopolitical tensions (especially if this results in higher energy and commodity prices), potential policy errors by the Fed, and social unrest around the US election. The changing world order – driven by geopolitical risks, demographic trends, increased fiscal activism, and a fracturing global economy – adds to the uncertainty. Despite the risks, the next few years should be a positive environment for financial markets. Whilst we are not about to return to a zero-rate world, cash will remain an important asset class and, at the same time, investors may be rewarded for taking on more risk in bonds and equities.   

Locally, this macro backdrop should also be positive for our own economy – assuming it plays out as expected. Like other major economies, Jersey’s growth will be dependent on the consumer and property prices. The combination of falling interest and mortgage rates, lower prices, a strong employment market, rising real incomes and a stronger global economy bode well for consumption and economic activity. Longer-term we face many similar issues as other developed economies, namely an ageing demographic, shrinking workforce, growing income and wealth inequality, climate change and the threat of higher long-term inflation.

Geopolitical risks could make Jersey more attractive, but the downside is potential upward pressure on an already expensive property market and further strain on the island’s infrastructure and healthcare systems. 

An important feature of our economy is the success and size of our finance industry. The above scenario bodes well for global financial markets and both our finance industry and economy are well-positioned to benefit from this. Additionally, the UK’s tighter fiscal and monetary policy are likely to help lower inflation and strengthen Sterling over the medium term.

So, despite the uncertainty, there are some positives but there is also no doubt that the States will continue to face a challenging and changeable macro backdrop. Therefore, a strong and decisive growth-focused leadership that is not afraid to make tough decisions, when required, will be key to making the most of any opportunities. 

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