Lessons for 2023 and Warnings for 2024

Every December, Saxo Bank traditionally publishes its Outrageous Predictions for the coming year. The most outlandish prediction for 2024 is the end of capitalism in the US, and the most unlikely is Japan’s GDP growth of 7%. As in past years, the Danish investment bank’s forecasts proceed from certain assumptions, which, admittedly, are based entirely on events that occurred during the outgoing year.

But the hypothesis about a sharp rise in oil prices to $150 per barrel or about the threat of revision of the terms for world trade between countries with trade deficits and surpluses do not seem too far from reality. The main premise of Saxo’s predictions for next year is that “the old-world system, which had virtually no geopolitical conflict, low inflation, and low interest rates” will not return, so it is clear that “a well-trodden road without pits and bumps has suddenly ended, and the world is moving into a very uncertain future.”

2023 got off to a rocky start, as it inherited from the previous year persistently rising inflation and high bank interest rates, calling into question the much-desired economic recovery that has yet to begin after the end of the pandemic. In October, the International Monetary Fund (IMF) stated that “global recovery remains slow, with growing regional divergences and little margin for policy error.” The global economy remains well below pre-pandemic levels. The estimated level of economic growth at the end of 2023 will be about 3%. Structural factors associated with ongoing geopolitical conflicts, as well as cyclical factors, such as monetary policies implemented to combat rising prices, continue to put pressure on the entire system. Regarding the GDP data, it is interesting to note that the slowdown of economic growth had a greater impact on the USA and Europe, while Asian countries remained the driving force of the world economy. Throughout 2023, fears of a recession have arisen many times, but judging by official data, most economies have managed to avoid it. However, at the end of the year, the European system began to show signs of fatigue and inability to overcome the uncertainty that persisted throughout 2023. If, on the one hand, the European economy managed to resist inflation and instability of energy supplies, then on the other hand, it was unable to overcome the constant rise in prices for energy resources and many other commodities, as well as the decrease in the competitiveness of its goods and services on world markets.

Germany, long considered the “economic locomotive of Europe,” was the hardest hit. Already in August, the British newspaper The Guardian cast a shadow over the German system and predicted “possible stagnation.” In September, a study conducted by the French bank BNP Paribas made it abundantly clear that Germany could face a recession as early as the second half of 2023. In October, it was the Bloomberg agency’s turn: according to a survey of various economists, the German economy was diagnosed as “Europe’s sick patient” with forecasts pointing to a 0.4% contraction of GDP in 2023, with hopes of a possible 0.5% recovery in 2024. In December, Bloomberg emphasized that “Germany’s problems were not isolated” and that other European countries, more specifically Italy, France, and Spain, “also showed a decline in industrial production.” Again, according to another survey conducted by Bloomberg, the entire European system will end the year with a decline in GDP, which will fall by 0.1 percent in the fourth quarter.

On the other side of the ocean, the United States seems to have avoided recession. Some analysts give credit for this to the Federal Reserve, which, through its interest rate policy, managed to achieve a kind of soft landing for its economy in 2023. In fact, while the Fed initially focused on curbing inflation by raising interest rates, it then managed to give the US economy time to adjust by leaving rates unchanged for the entire second half of 2023. Nonetheless, the newspaper The Hill reports that, according to a Bankrate poll, “six in ten US citizens believe the US economy is already in recession,” even though the collapse of the economy that many predicted at the end of 2022 never happened. Thus, both the “soft landing” scenario and the possible US slide into recession still remain open for 2024, and much will depend on the monetary policy decisions of the Fed itself. While the US Central Bank said nothing in early December about possible future rate cuts, during a press conference following the results of the last meeting in 2023, Fed Chairman Jerome Powell asserted that the Central Bank would not only once again leave interest rates unchanged, but also left the door open for possible future reductions in their level, stating that “the Fed believes it has already done more than enough.”

Monetary policy decisions will also be important for the banking sector, with the remaining risks of further crisis. According to the latest data, the liquidity crisis continues to create problems for the financial sector until the last days of 2023. It now appears that liquidity for REPO operations is not sufficient to clear all transactions.

As to global economic estimates for 2024, all the world’s largest countries seem to be on their path to decline, although a significant part of the countries will again be able to avoid recession.

In liquid hydrocarbon markets, 2023 was dominated by uncertainty. Benchmark oil prices of WTI and Brent, despite ongoing geopolitical conflicts, followed downward price trajectory throughout 2023, recording some sporadic price hikes due to production cuts adopted by OPEC+. Despite initial signs of decline in global consumption, which led to falling prices, oil demand is doomed to continue rising. In its November analysis, the International Energy Agency (IEA) estimated that daily oil demand would increase by 2.5 million barrels by the end of 2023, bringing the total to 102 million barrels per day. In the future, the price of oil will mainly depend on the state of the Asian economies, primarily China. According to a Bloomberg survey, China may reduce oil imports in 2024, which will signal further decline in the chances of economic recovery in the Celestial Kingdom. Even the US Energy Information Administration (EIA), in its latest 2023 newsletter, taking into account the reduction in demand, revised the 2024 forecast for average Brent prices from $93 to $83 per barrel. This price is slightly higher than the average price of $81.86 recorded in 2023. Although, there are forecasts about a reduction in demand, analysts at Goldman Sachs bank estimate that the average price of Brent oil in 2024 will be $92 per barrel. Analysts at JP Morgan Bank expect the price to be in line with the EIA forecast, which is around $83 per barrel. Analysis by US consulting agency Wood Mackenzie indicates that the average price of a barrel of oil in 2024 will be $90. This context of uncertainty on the demand side will be a very important factor in the adoption of strategies and decisions from the side of OPEC+ that will try its best to balance the oil market, which, on the one hand, suffers from a lack of new investments in production and in the exploration of new deposits, and on the other hand, it may face an oversupply caused by a reduction in consumption due to the economic downturn in the global economy.

Turning to the natural gas market, particularly in Europe, in 2023, despite a decrease in import volumes as a result of the severance of trade relations with Russia, a certain streamlining of supplies has occurred. In 2023, gas supplies from Russia were replaced by supplies from other countries, primarily from the USA. The liquefied natural gas (LNG) market is growing steadily, to the extent where long-term supply contracts have already been signed with countries of the Middle East. Gas prices have fallen throughout the year, but are likely to generally remain above average, since LNG supplies have logistical risks that may affect the stability of the flow in the medium term, also accounting for the lack of those gas volumes that may be sold on the market only after 2026.

As for specific numbers, gas prices in 2023 in the European market fell by 68%, and according to the World Bank (WB), the decline in 2024 could be another 4% due to a possible slowdown in the economies of European countries. In the USA, gas prices could fall by 20% next year, and LNG prices will be reduced by 7%.

Thus, the inflationary spiral may continue into 2024 if energy prices, primarily hydrocarbons, remain high. Another element of uncertainty, therefore, concerns the consequences of the “coexistence” of inflation and economic recession – a scenario that everyone is simply afraid to mention.

Thus, the only certainty for markets in 2024 will be the uncertainty caused by rising geopolitical conflicts. 2023 showed that the global problems, which emerged during the Russian-Ukrainian conflict, were much deeper than politicians and economists were willing to admit. And they are still not willing to do this. After several years of precarious balance, armed conflict broke out in the Gaza Strip. Despite the Israeli army’s claims that Hamas has been defeated in a very short time, fierce fighting is now in its third month, and the uncertainty of the Palestinian people’s fate is the prevailing problem, regardless of who wins and what conditions are imposed at the end of the conflict.

To make matters worse, in early December, the territorial dispute between Venezuela and Guyana again became relevant in South America, as the richest oil reserves were discovered in the disputed territory of Esequibo between 2015 and 2021, which are estimated at 8 billion barrels, not to mention gas and gold. In addition, after the presidential elections in Argentina, the government of new President Javier Milei is ready to withdraw Argentina’s candidacy for membership in BRICS, since it “does not see sufficient benefits for the country from this move,” effectively breaking a promise made by the previous Argentine president.

Speaking of elections, 2024 will be a year full of electoral commitments, or rather promises, that will have a profound impact on the future model of global governance. Bloomberg calculated that elections will be held in 40 countries next year, which account for almost half of the world’s population, or 41% to be more exact, and 42% of world GDP.

Six of the upcoming elections are in the global spotlight and could have a truly profound impact on the geopolitical balance. On the Asian continent, voters in Indonesia and India will vote in February in what is believed to be a vote to reaffirm their trust in their countries’ current political leaders. Then, in March 2024, Taiwan will hold elections that will determine the continuation of relations between China and the USA. Also in March, there will be presidential elections in Russia. After this, the voters of the Old Continent will have to renew the composition of their representatives in the European Parliament, after which the main “interpreters of European politics” will be selected. Finally, in November, the USA will vote to elect a new president or to confirm the current head of the White House, Joe Biden, for the second term.

Whatever the outcome of the tangle of elections in 2024, one element of certainty in a sea of uncertainties will be the irreversibility of the process of forming a new multipolar world. The year 2023 provided the strongest push in this direction, both economically and politically. We have witnessed the first major BRICS expansion, which, from January 1, 2024, will include, in addition to Argentina (which now depends on the new president Javier Milei), also Saudi Arabia, Egypt, the United Arab Emirates, Ethiopia, and Iran. Looking to the future, there are other countries that are keen to join BRICS and may formally apply for membership already in 2024. The new multipolar world will bring with it further decentralization and weakening of the established financial systems, primarily American and European, which have so far dominated world markets. Transactions and trade in national currencies could further increase by moving away from the dollar and euro.

In this context, the relationship between the dollar and the price of oil may also be weakened, since producing countries may have an additional incentive to decouple the US currency from quotations in order to avoid future sanctions that the United States may resort to if its control over global governance weakens even more.

As for global financial markets, most attention is focused on the monetary policies of Central Banks, especially the Federal Reserve System in the USA, which is still capable of influencing with its choices not only the economy of the United States, but of the entire world. It is believed that inflationary pressure will continue and will influence the choice of monetary policy. According to the study by Deutsche Bank, the US could experience a contraction in GDP with very modest growth of 0.6% in the first quarter of 2024. This, according to analysts at the German bank, could lead to a reduction in interest rates by 175 basis points. Rate cuts should also benefit emerging economies, which will take advantage of lower financing costs and strengthen their trade balances. This could obviously help the dollar remain the benchmark currency for global transactions. Analysts from Bank for International Settlements (BIS) are convinced of this, highlighting the decline in long-term yield curves beginning in November 2023.

Unfortunately, or fortunately, we are not seers, and we have neither coffee grounds nor a crystal ball capable of predicting the future. However, no matter what events we may witness in the coming year, there is hope that all problems, old and new, can be resolved through dialogue and diplomacy, both political and economic, which has become especially important in recent years.