My most unconventional projection for 2024 revolves around our growth forecast. Anticipating a Q4/Q4 GDP growth of 2%, my prediction significantly exceeds the consensus of 0.9% and the FOMC’s forecast of 1.4%.
This outlook is grounded in my belief that the influences of changes in financial conditions and fiscal policy alterations will be modest, maintaining a roughly neutral impact next year.
I also foresee consumer spending surpassing expectations with a projected growth of 2%, outperforming the consensus of 1%. This optimism is fuelled by my expectations of approximately 3% growth in real income and the fact that household net worth is nearing an all-time high.
Aligned with my growth perspective, I anticipate a robust labour market in 2024. Supported by a healthy foundation characterized by high job openings and a low layoff rate, coupled with diminishing recession concerns, I anticipate consistent job gains throughout the year, converging to a breakeven pace of around 100k. This trajectory is expected to maintain the unemployment rate at a low level of approximately 3.6%.
In terms of wage growth and inflation, I foresee a moderation to levels compatible with targets in 2024. The drivers behind elevated wage growth in the past two years, such as labour market overheating and inflation shocks, are now diminishing.
Consequently, I anticipate wage growth to decline towards a pace of 3.5%, aligning with 2% inflation. Core PCE inflation, after a notable slowdown in the second half of 2023, is projected to settle in the low 2s on a year-on-year basis by spring, reaching 2.2% at the end of 2024—undershooting the FOMC’s 2.4% forecast.
The swift decline in inflation is expected to prompt the FOMC to implement early and rapid rate cuts to realign the policy rate, given that most participants are likely to perceive the current level as offside. My forecast anticipates three consecutive 25 basis points cuts in March, May, and June, followed by one cut per quarter until the funds rate reaches 3.25-3.5% in 2025Q3. This translates to 5 cuts in 2024 and an additional 3 cuts in 2025. Furthermore, I anticipate the Fed to decelerate balance sheet runoff in 2024Q4, concluding it fully in 2025Q1.
Contrary to expectations of fiscal policy becoming more stimulative ahead of the election, I foresee a slim likelihood. In fact, there is downside risk to government spending due to potential automatic cuts taking effect in May if Congress opts for temporary extensions instead of full-year spending bills. These cuts could result in a reduction of funding by approximately 2% (0.4% of GDP).
Market commentary and analysis from Luca Santos, currency analyst ACY Securities
