Global economic forces
Tailwinds
- Likely approaching Federal Reserve (Fed) pivot to more accommodative monetary policy later in 2024
- Still-ample U.S. and global liquidity conditions
- Bank credit standards tight, but easing
- Adequate real income growth supported by disinflation and by elevated wage and job gains
- Productivity-enhancing investment, including artificial intelligence (AI), supports growth potential
- Still sizable cash balances among middle- and upper-income groups1
- Release of pent-up services demand still supporting growth
- Supportive fiscal stimulus on proposed tax cuts, increased spending from 2023 measures
- U.S. dollar pullback, commodity super-cycle underpins commodity prices, producers’ exports and emerging market finances2
Headwinds
- Lagged impact of past central-bank rate hikes and rising real (inflation-adjusted) interest rates until policy pivots occur
- End to post-pandemic supports to disinflation, employment, and pent-up demand
- Slow decline in wage and service inflation
- Higher rental inflation, sticky food and energy inflation from tight supply, geopolitical strain
- Increased debt and distressed borrowing, particularly among lower-income households
- Historically low home “affordability” hampers full-blown housing recovery
- Deteriorating supply chains due to geopolitical disruptions
- Weak global trade losing support from China’s struggling economy, fragile growth in Europe
Source: Wells Fargo Investment Institute, as of March 31, 2024. Subject to change.
1. Federal Reserve Board, Financial Accounts of the U.S., as of March 7, 2024.
2. If you look at commodity prices over the very long term (hundreds of years), it becomes evident that they tend to move in overall bull and bear cycles, some lasting decades. These are super-cycles.
Key Takeaways
- A modest economic slowdown, rather than a recession, seems increasingly likely, given that current financial conditions are more accommodative than usual in the late stages of an economic cycle.
- The most visible risk in our outlook is a sudden reversal of easier financial conditions, leaving leveraged sectors of the global economy and elevated asset values exposed to an abrupt pullback.