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1、GlobalOutlook2024Ronald TempleChief Market StrategistGlobal Outlook 202422023 gave us:The highest inflation and sharpest monetary policy tightening in four decades.US resilience as wealth effects and full employment drove consumer spending.Weak Chinese growth on the back of a real estate and consume
2、r confidence crisis.Lethargy in the Eurozone as rate hikes and export weakness buffeted economies.UK stagflation with growth below 0.5%and inflation over 7%.Geopolitical turmoil and humanitarian disasters in Ukraine and the Middle East.More evidence of climate change as temperatures hit new records.
3、The outlook for 2024 stands in stark contrast to 2023 with:Rate hikes likely shifting to cuts as inflation falls to 2%.The Fed engineering a“soft landing”avoiding US recession.China sentiment improving despite the ongoing housing overhang.The Eurozone and UK teetering on the brink of recession as st
4、icky inflation precludes easing.Japan exiting yield curve control and negative interest rates.The Ukraine war dragging on and Western tensions with China ratcheting higher.US elections becoming the focal point as a determinant of the geopolitical trajectory.Global Outlook 20243Introduction The globa
5、l economic landscape is in flux.The sharpest mone-tary policy tightening in four decades slowed growth less than ex-pected,but long and variable lags between policy changes and economic impact suggest recession risk remains pronounced.In recent decades,the United States and China have been the two p
6、rimary economic locomotives.In 2023,US growth surprised on the upside as consumers depleted much of the over$2.25 tril-lion of excess savings accumulated during the pandemic.Going forward,consumers will increasingly rely on wage gains and,to a lesser degree,Federal Reserve easing to support spending
7、.Growth in China faltered as the housing sector,which compris-es nearly a quarter of GDP,fell into crisis.This led to a raft of stimulative measures announced by various levels of govern-ment,which should lift prospects next year.Stagflation plagued the Eurozone through much of 2023,but conditions a
8、re likely to improve in 2024 as disinflation progress-es.Unfortunately,recession appears likely,with 3Q23 data showing a 0.1%contraction in Eurozone real GDP,with Germany and other industrially intensive economies weighing on the re-gions output,while more service-driven economies outperform.Japan i
9、s the outlier as the only developed economy maintain-ing negative interest rates.I expect Japan to continue growing above potential through 2024 as the Bank of Japan(BoJ)seeks to avoid snatching defeat from the jaws of victory in its battle against deflation.The highest geopolitical risk in decades
10、has compounded eco-nomic uncertainty.Between ongoing war in Ukraine,a human-itarian disaster in the Middle East,and rising tensions between China and the West,executives and investors can no longer assume a placid geopolitical backdrop when making decisions.While predicting the course of any single
11、geopolitical crisis is fraught,what is clear is that the global trajectory is toward more frequent conflicts of increasing consequence.Navigat-ing the evolvingat times treacherousgeopolitical land-scape will likely require access to deep wells of expertise,as geopolitical issues that could have been
12、 ignored in the past now stand to directly impact companies supply chains and customer bases.Global Inflation and GrowthBoth headline and core inflation are likely to continue subsid-ing through 2024.Energy prices have largely driven the fall in headline inflation to date.After Russia invaded Ukrain
13、e,ener-gy inflation topped 40%y/y in the Eurozone and United States,and reached 59%in the United Kingdom.Energy prices have declined since to levels in line with the prior year implying zero contribution to headline Consumer Price Indexes(CPI).Dissipating energy inflation(which might not be sustaine
14、d)oc-curred alongside the elimination of supply chain bottlenecks and semiconductor shortages;these combined with a surge in demand to cause the spike in core goods prices in 2021 and 2022.Fed analysis indicates supply chains are in better shape now than before the pandemic which has fed into lower
15、core CPI.US core CPI has fallen from a peak of 6.6%to 4.1%and is likely to fall further as shelter inflation decelerates.In the Euro-zone,core inflation declined from 5.7%to 4.5%,while UK infla-tion has fallen from 7.1%to 6.1%.Despite still-elevated core inflation,I believe the Fed,European Central
16、Bank(ECB),and Bank of England(BoE)have finished their rate hike cycles.While one more hike is possible,from cur-rent levels a 25 basis point(bp)rate hike is not very impactful.What is more important is how long rates remain elevated.Con-sumers and companies have been able to withstand higher rates s
17、o far,but the brunt of the rate increases really occurred in the US$2.25 trillionIn 2023,US growth sur prised on the upside as consumers depleted much of the overof excess savings accumulated during the pandemicGlobal Outlook 20244last 15 months.Historically,economists assume it takes about 18 month
18、s for monetary policy changes to fully materialize in the real economy,which implies additional stress could be ahead.The battle against inflation is not won,but the tide has turned in favor of central banks.The cost of this victory has been eco-nomic deceleration.While the US finds itself in a stro
19、nger po-sition in 2023 than prepandemic projections implied,the rest of the world has not fared so well.Advanced economies are between one and two percentage points smaller than implied by prepandemic trends,largely because of the lack of fiscal lat-itude to intervene as the United States did.Accord
20、ing to the International Monetary Fund(IMF),global fis-cal stimulus measures from January 2020 through April 2021 totaled US$10.8 trillion,of which US$5.3 trillion was spent in the United States.This implies that 50%of global stimulus was deployed on behalf of just over 4%of the worlds popula-tion.U
21、S fiscal stimulus was nearly matched by a US$4.8 tril-lion increase in the Feds holdings of public debt between the end of 2019 and May 2022.It should be no surprise that the US economy was robust despite the Feds rate hikes given US$10 trillion of stimulus.Looking forward,global growth projections
22、for 2024 are mut-ed,as countries grapple with higher interest rates,shrinking fiscal flexibility,and trade fragmentation.Ongoing geopolitical conflicts and tensions are likely to depress growth further,while adding to inflationary pressures that are beyond the control of central banks.The good news
23、is that sustained disinflation should allow the Fed to contemplate reducing policy rates as early as 2Q24,which should mitigate headwinds to growth and invigorate capital expenditures in anticipation of a cyclical eco-nomic rebound.United StatesThe US economy was far more durable than expected in 20
24、23.The labor market added an average of 239,000 jobs per month,far above the number required to maintain a stable unemploy-ment rate relative to population growth.With disinflation well underway,the United States is entering 2024 in a good posi-tion.The key question is whenand how quicklywill inflat
25、ion return to the Feds 2%target?The answer will determine how soon the Fed can begin easing policy conditions.I remain optimistic that US inflation will decelerate relatively quickly based on our assessment of the three key categories within core CPI.Shelter inflation(44%weight)has decelerated from
26、over 16%early in 2022 to only 3%as of September 2023,based on Zillows Observed Rent Index.This metric tracks asking rents for new leases and hence tends to lead CPI shelter infla-tion by about one year.Given that the most recent CPI shelter inflation reading exceeded 7%,this component alone gives us
27、 confidence that inflation will be materially lower next year.The second key category is core goods(26%weight)which in-cludes all goods excluding food and energy.Core goods prices Headline Inflation Has Peaked across Developed EconomiesUnited StatesUnited KingdomEurozoneChinaJapan-4048918
28、26Inflation(%YoY)As of September 2023Source:Bank of Japan,Bureau of Labor Statistics,China National Bureau of Statistics,Eurostat,Haver AnalyticsCore Inflation:Japan at Peak,Eurozone,UK,and US Falling-20246820232020092007Core Inflation(ex-Food and Energy)(
29、%YoY)United KingdomChinaJapanUnited StatesEurozoneAs of September 2023Source:Bank of Japan,Bureau of Labor Statistics,China National Bureau of Statistics,Haver Analytics,EurostatDifference between Countries 2023 Real GDP and the IMFs Prepandemic Projections(%)United States-7-6-5-4-3-2-10-1Advanced E
30、conomiesEuro AreaWorldChinaEmerging MarketsSource:International Monetary FundGlobal Outlook 20245have been declining,including a sizable 40bp decline in the month of September alone.The recent news that the United Auto Workers(UAW)strike is likely over increases our confidence that core goods prices
31、 will remain tame,or even continue declining in 2024.The third category in core CPI is services excluding shelter and energy services(30%weight).This category is driven pri-marily by labor costs.Normalization in the labor market appears to be underway as the number of unfilled jobs has de-clined fro
32、m 2.0 per unemployed worker to 1.5 since July 2022.At the same time,the voluntary quit rate has declined from a re-cord high 3.0%per month to 2.3%,in line with the two years before the pandemic.The Fed appears to be successfully navi-gating a soft landing in which unemploy-ment rises only marginally
33、,while labor market tightness fades as demand for labor weakens.If the labor market con-tinues its current trajectory,I expect core CPI to reach 2%in the second half of 2024,which should allow the Fed to cut rates in anticipation of that landing.On top of the good news on the inflation front,2024 mi
34、ght represent an econom-ic inflection point if the Biden admin-istrations industrial policy can create competitive,export-based industries.Landmark pieces of US legislationsuch as the bipartisan Infrastructure Invest-ment and Jobs Act in 2021 and the Infla-tion Reduction Act(IRA)and the CHIPS In the
35、 United States,the labor market added an average of jobs per month through October,far above the number required to maintain a stable unemployment rate relative to population growth239,000Core Goods Prices Are Falling;Shelter and Other Services Inflation Remain Elevated-303692202120202019
36、200012Inflation for Key Categories(%YoY)Services Ex Energy Ex ShelterShelterCore GoodsAs of September 2023Source:Bureau of Labor Statistics,Haver AnalyticsUS Rent Inflation Has Fallen from 16%to 3%-202320222021820172016US Rental Price Changes Range,Median,
37、and US Index(%)United StatesRange of Observations among Top 100 CitiesAverageMedianAs of September 2023The Index covers the largest cities in the United States beginning in 2015.Shaded gray area shows range from the lowest rent inflation to highest among largest 100 cities in the Index.This index ca
38、ptures asking rents(not agreed rents)for new leases only(not including renewals).Source:Z Observed Rent IndexGlobal Outlook 20246Act in 2022are expected to add to productivity growth over a multi-year period as government incentives stimulate increased private sector investment.The IRA is likely to
39、surprise on the upside with the Brookings Institution and Goldman Sachs both independently estimating that total funding under the IRA could reach US$1 trillion as companies rush to capitalize on subsidies intended to establish the United States as a leader in the energy transition.Yet,downside risk
40、s remain.Access to credit could become in-creasingly constrained.Ongoing challenges in the commercial real estate market and the increased cost of funding for banks are likely to feed into tighter underwriting standards and high-er-cost financing for consumers and companies who can still obtain cred
41、it.If monetary policy still works with long and vari-able lags,it would be premature to declare this an“immaculate disinflation.”A recession is no longer our base case,but if one does occur in 2024,the economy is in a strong position,sug-gesting a short and shallow downturn.A second key risk to the
42、US economy is ongoing political dys-function.While Congress averted a government shutdown and,more critically,avoided default by raising the debt ceiling un-til January 2025,the ousting of Kevin McCarthy as Speaker of the Houseand the subsequent three-week period without a replacementsuggests there
43、may be further political volatili-ty ahead.While I agree that US fiscal deficits are on an unsus-tainable trajectory,the solution is not default or shutdowns;its bipartisan compromise that addresses the structural deficien-cies of current spending and tax policies.Finally,the 2024 US election could
44、be a watershed moment geo-politically,as further aid to Ukraine hangs in the balance along with foreign policy predictability and rule of law.Many investors assume the United States will always have the reserve curren-cy of the world and enjoy the“exorbitant privilege”that comes with such status,giv
45、en the absence of obvious alternatives to-day.I would caution against such presumptuousness.The Unit-ed States derived its reserve currency and safe-haven status by proving the resiliency of its institutions,developing a democracy that was largely a question of shades of gray rather than extreme bin
46、ary choices,and through consistently applied rule of law.The United States also benefited from the absence of viable alterna-tives after World Wars I and II decimated competitors econo-mies.Increasingly,consumers,companies,and countries have more choices.No one should presume that the United States
47、is entitled to exceptional status without earning it.Shelter inflation in the United States decelerated fromin 2022as of September 202316%3%toThe US Is Creating More Jobs than Are Required to Maintain Stable Unemployment-800-600-60023222009080706Average Monthly Ch
48、ange in Private Nonfarm Payrolls(Thousands)As of September 2023 Source:Bureau of Labor Statistics,Haver AnalyticsLabor Market Tightness Is Easing:1.5 Unfilled Jobs/Unemployed Worker0.00.51.01.52.02.520232020092007200520032001US Unfilled Jobs per Unemployed Person(Ratio)As of Se
49、ptember 2023 for unfilled positions.As of October 2023 for unemployed workers.Source:Bureau of Labor Statistics,Haver Analytics7Global Outlook 2024ChinaMany observers expected the post-COVID reopening of China to boost global growth in 2023,only to see that optimism quickly dashed.Consumers did retu
50、rn to restaurants and cinemas,but they largely refrained from big ticket purchases.Consumer confidence data highlighted this negativity.The root cause of the eco-nomic lethargy are problems in the real estate industry which have affected proper-ty developers and municipal finances,and have ultimate-
51、ly contaminated the broader economy.Real estate com-prises between 15%and 30%of Chinas GDP depending on how expansively the sector is defined.If we split the dif-ference and say real estate development and directly related services comprise 20%25%of GDP,it is clear real estate is vital to Chinas eco
52、nomic well-being.As importantly,for the medi-an household in China,real estate typically comprises 60%70%of assets,meaning housing prices have a major impact on psychology.From 2000 to 2010,about 18 million new housing units were developed each year in China as urbanization shift-ed the population f
53、rom rural areas to cities and as the housing stock was upgrad-ed to reflect higher incomes and assets.However,along the way,the new supply be-gan to exceed real economic demand.The gap was large-ly filled by speculators who had only experienced one trend through time:rising home prices.Ultimately,th
54、e central government cracked down on developers by en-acting a“three red lines”policy that limited leverage in the sector and shut off financing.This began the current real estate develop-er crisis.The government also launched verbal attacks on speculators,with Xi Jin-ping repeatedly noting that“hou
55、sing is for living,not for speculation”as the cost of housing was creating social tensions.As lack of credit began to bite,privately owned real estate developers encountered fi-nancial difficulties that made delivering presold homes challenging.About 50%of the largest private developers have now def
56、aulted on their debts,causing consumers to lose confidence in develop-ers and in the idea that home prices always go up.This negative view on house prices is not easy to validate in publicly reported indices.For example,the popularly referenced 70-City House Price Index in China captures new home pr
57、ices in Tier 1,2,and 3 cities.However,the index does not accurately portray reality.When devel-opers gain approval to mar-ket a new housing complex,they typically set the price in agreement with local authori-ties and cannot change those headline prices afterward.Developers can offer bonus amenities
58、 such as a free parking spot or credits to buy appliances,but they can-not cut prices.This means Chinese Consumer Confidence Remains in the DoldrumsIndex Base Year=1997;100=Neutral8090020232020092007200520032001OptimisticAs of September 2023 Source:Bloomberg,National
59、 Bureau of Statistics of ChinaGlobal Outlook 20248that the reported 2%5%price declines in the 70-City House Price Index do not reflect the discounting that is occurring.We have learned that in secondary mar-kets,home prices are now down 15%20%in Tier 1 cities and 30%or more in lower tier cities,sign
60、aling a significant hit to consumer net worth and a much more dire story than public data imply.Fortunately,this does not mean China faces a US-style housing bust or a fi-nancial crisis,as regulations on loan-to-value ratios are much stricter in China than US rules in 20052008.As such,even with home
61、 prices down 15%30%,homeowners in China still have(siz-able)equity cushions and remain in the black.However,this loss of net worth still does not bode well for consumption and confidence.Initially,the Chinese government watched passively as the economy fal-tered,but in the second half of 2023,the au
62、thorities launched dozens of mea-sures to prop up the economy and to increase demand for housing,including for investment properties.In October,the central government announced a mid-year revision to the central govern-ment budget and fiscal deficit target for the first time since the Asian Financia
63、l Crisis in 19982000.The decision to is-sue CNY 1 trillion of incremental central government debt to fund local govern-ment spending might be the most im-portant measure so far.While I do not expect a flood of credit stimulus due to Chinas elevated debt levels relative to other large economies,I do
64、believe we will see continued steps to ensure a min-imum level of growth into 2024.Overall,I believe sentiment regarding China has gotten too negative,given the array of recent stimulative measures and the sharpness of the decline in new housing construction,which has already occurred and will likel
65、y lead to stabiliza-Real estate typically comprisesof assets for the median household in China,meaning prices have a major impact on psychology60%70%China Property Prices Remain Weak,Dampening Confidence-202320222020012201170-City House Price Index for Sal
66、e Prices of Residential Buildings(%YoY)Tier-3Tier-2Tier-170 CitiesAs of September 2023 Source:National Bureau of Statistics of China,Haver AnalyticsChina Is among the Most Leveraged Large Economies Globally00500JapanFranceCanadaChinaItalyUnitedStatesUnitedKingdomGermanyBrazilSouthAfricaTu
67、rkeyRussiaIndiaMexicoIndonesiaNonfinancial Debt as%of GDPNonfinancial CorporationsHouseholdsGeneral GovernmentAs of 2Q 2022Source:BIS,Haver AnalyticsChinese Authorities Have Announced Numerous Stimulative MeasuresStimulusDetailsCNY 1tn central government bond issuance to fund local government rebuil
68、ding in disaster hit areas and improve urban drainage and flood prevention Mid-year FiscalDeficit AdjustmentThe PBoCs one-year medium-term lending facility was cut by 15bps in August,to 2.5%,the largest since 2020,and the second cut in 2023PBoC rate cutCut Reserve Requirement Ratio(RRR)twice(-25bps
69、in March and-25bps in September)leaving weighted RRR at 7.4%and freeing$69bn for lendingPBoC Bank Reserve Requirement Ratio CutConsumption support package,including rural e-commerce expansion,cheaper home renovation services,tax exemptions on EV purchases,and moreConsumption support Banks have cut r
70、ates on up to$5.3tn of existing mortgages in Tier 1 and 2 cities Tier 1 cities lowering mortgage requirements and purchase curbs to increase home sales Relaxation of home purchase restrictions and down payment reductions in Tier 1 cities Housing markets and local banks Increasing support of the Yuan
71、,as PBoC issued verbal warning about trading levels and committed in July to keep the Yuan stable around 7.3 RMB/USD Lowered stamp duty on stock trades in August to bolster equities market.Securities regulator slowing IPOs and encouraging buy-backsFinancial marketsLess ImpactfulMore ImpactfulAs of N
72、ovember 2023Global Outlook 20249 9tion in building activity in 2024.Moreover,there are signs of consumer confidence and spending bottoming,suggesting near-term improvement is at hand.Another positive is that China has be-come the largest exporter in critical stra-tegic sectors like electric vehicles
73、(EVs)and solar and wind power.In EVs,for example,China went from a net import-er in 2019 to the largest net exporter in 2023.Similarly,China has embedded itself within the renewable energy sup-ply chain,which should lead to growing Chinese exports as demand for compo-nents grows.By positioning itsel
74、f as the low-cost producer in high-growth sec-tors of the global economy,China has likely secured additional growth for years to come,even if it might be blocked from US markets in some cases.Finally,since mid-2023 the US-China re-lationship has begun to thaw.While an-ti-China hawkishness is biparti
75、san and firmly entrenched in the United States,the Biden administration has sought to ease relations,with multiple members of the US government visiting Beijing before year-end.The likely meeting of President Biden and President Xi before the end of 2023 could open the door for a near-term reprieve
76、in trade relations.One of Chinas biggest long-term prob-lems remains that it is too focused on investment,and not enough on domes-tic consumption.There are some signs that this is changing.In 2022,a greater share of Chinese bank loans went to the industrial sector instead of real estate,for the firs
77、t time in two decades.However,the fundamental model that has brought China success since the 1990s is running out of steam.The Chinese economy is not constrained by too-low savingsas is common for lower income countriesbut by savings that are too high.Yet the Chinese government seems unwilling to sh
78、ift from this model,and the longer this goes on,the more disappointing Chinas growth will be.One way to shift the model would be by implementing a more robust social safety net that gives households the confidence they need to sustain consumption even in times of economic stress or as they age.Euroz
79、oneIn the Eurozone,the good news is that in-flation has peaked.The bad news is that with the absence of fiscal stimulus of a scale seen in the United States,hits from the Ukraine-driven energy price shock,and ECB interest rates hikes,the Euro-zone economy is teetering on the brink of recession.I pla
80、ce the odds of reces-sion in the Eurozone at about 50%over the next 12 to 18 months,with reces-sion potentially already underway given the 3Q23 GDP reading of-0.1%quar-ter-over-quarter.Interest rate transmission in the Eurozone is swifter than in the United States as over 70%of Eurozone corporate fu
81、nding is from banks(often at floating rates)versus 80%of US corporate funding from debt markets(largely at fixed rates).Rising in-terest expenses and sharply higher fuel prices hit Germany hardest,with indus-trial production for the energy-intensive portion of the economy now 15%below the level of 2
82、015.The winter of 20222023 was unusually warm,but there is no guarantee this winter will be as kind,which could lead to more pressure on in-dustrial output.Europe has made progress in weaning itself off Russian energy,but this pro-cess will take years.Fortunately,there is momentum to increase energy
83、 indepen-dence by constructing LNG terminals,raising investment in nuclear power,and doubling renewable energy as a share of EU consumption to 42.5%by 2030.These measures,combined with carbon pricing,border adjustment taxes,and specific in-dustrial policies,should improve Europes energy competitiven
84、ess over time.Consumer confidence has also suf-fered in the Eurozone,with war on its doorstep compounding the financial challenges facing the region.Retail sales in the Eurozone remain below the prepandemic trend while US sales are well above.European real income is improving as disinflation continu
85、es,but we have not yet seen that translate into increased confidence and con-sumption.Moreover,even a short-term improvement in real income will not reverse the widening income gap that 70%Interest rate transmission in the Eurozone is swifter than in the United States as overof Eurozone corporate fu
86、nding is from banksGlobal Outlook 202410has opened between the United States and Europe.In 2002,US per capita income(in 2010 USD)was 12%higher than in France and 16%higher than in Germany.By 2022,US real per capita income had grown 30%and was 28%higher than in France and 23%higher than in Germany.Th
87、e ongoing relative stagnation of the European economy is not lost on consum-ers,as shown in confidence data.As with the Fed,I believe the ECB rate hike cycle is over.Euro-zone disinflation is not as well progressed,but as recession risk rises and inflation slows,I expect the ECB to remain on hold an
88、d allow measures already taken to have their effect.Unlike the Fed,I do not expect any rate cuts from the ECB until 2H24 as the single price stability mandate precludes the ECB from easing rates to raise employment.Another risk in 2024 is political.Ongoing economic stagnation combined with elevated
89、immigration,driven by wars in neigh-boring regions,could lead to rising support for extremist po-litical parties.Ironically,Europe may need more young skilled immigrants at precisely the time that anti-immigrant sentiment is rising.Given that the European Unions median age is 44.4 years old versus t
90、he United States at only 38,either raising birth rates or increasing immigration would help mitigate rising dependency ratios.Unfortunately,the current landscape is not conducive to such policies.European Consumer Confidence is Weakening Again-30-25-20-15-10-502320907050308987E
91、uropean Consumer Confidence Is Weakening Again(Seasonally Adjusted,%Balance/Diffusion Index)As of October 2023Source:Bloomberg,European Commission US GDP per Capita Meaningfully Surpasses that of European Peers 20,00030,00040,00050,00060,0002220806040200989694GDP per Capita(US$)USSpainIta
92、lyGermanyFranceAs of 2022,and 2021 for the UK,EU data prior to 2000 is estimatedSource:Bureau of Economic Analysis,European Central Bank,Haver Analytics,OECD,Office of National StatisticsEnergy-Intensive Industries in Germany Suffer from Higher Energy Costs80900222021820172016G
93、erman Production Energy-Intensive Industries and Overall(Index=January 2015)Energy-Intensive Industrial ProductionTotal Industrial ProductionAs of August 2023 Source:DESTATIS,Haver AnalyticsEnergy-intensive industrial production in Germanyis now 15%below the level of 2015Global Outlook 202411JapanTh
94、rough the second half of 2023,the BoJ significantly curtailed its policy of yield curve control(YCC)by progres-sively widening the permissible trading ranges for long-dated Japanese Govern-ment Bonds(JGBs).In 2024,markets will watch for a formal end of YCC and then the focus will shift to when the B
95、oJ ends its negative interest rate policy(NIRP).While other advanced economies have been tightening monetary policies,the BoJ has been hoping to take advantage of price pressures and reflate the econo-my.There are some signs this is working:Japanese real wages are growing,and the labor market is tig
96、ht.Given Japans deflationary record,inflation is welcome,and so far,it seems healthy.The decision over when to end NIRP will largely depend on the BoJs assessment of the sustainability of inflation,which is contingent on ongoing wage growth.The key shunto negotiations for labor in Japan occur in the
97、 spring,but the Japa-nese Trade Union Confederation(known as Rengo)has indicated it is seeking a wage increase of at least 5%in 2024.Based on analysis of past wage requests versus realized gains,the indication for 2024 suggests wage growth will be suffi-cient for the BoJ to consider ending NIRP.Actu
98、al results of the shunto will not be available until April or May,but the BoJ seems unlikely to wait for the news if in-flation remains near current levels.The BoJ is hoping it can exit NIRP with-out disrupting the financial system and the economy.One concern for Japan is that if it does convince ma
99、rkets that inflation will remain at 2%for the fore-seeable future,there could be an inter-est rate shock,as investors would be unlikely to buy a 10-year JGB at a yield of less than 1%with inflation at 2%.If 10-year yields were to rise to a level that not only compensated for inflation but also inclu
100、ded a term premium,one could imagine a 2.5%3%yield that would imply large unrealized losses on bond portfolios held by banks and the BoJ it-self.The key to such an interest rate ad-justment would be the amount of time it takes to occur.If the BoJ could choreo-graph a rise in rates over multiple year
101、s,securities would mature at par and be replaced by higher-yielding assets,help-ing banks earn their way out of the bind.However,markets rarely behave this way,which raises the risk that the BoJ can only go so far in allowing markets to determine rates.The alternative of maintaining excessively easy
102、 monetary policy could mean further yen weakening,which imports more in-flation into Japan and ultimately requires a response.Exiting YCC is less risky than ending NIRP in my view,but the challenge in markets is that the end of YCC will be viewed as the beginning of the end of NIRP.The bottom line i
103、s that the BoJ has a serious challenge on its hands.Another important topic to watch in Ja-pan in 2024 is the ongoing governance shake-up instigated by the Tokyo Stock Exchange(TSE).The TSE now requires companies whose shares trade below book value for a prolonged period to publicly announce how the
104、y plan to re-solve the issue,or face delisting.When the policy was announced,50%of all companies trading on the TSE were trading at or below book value.The pol-icy change has led to record levels of share buybacks and increased dividend payments as companies strive to avoid this ignominious outcome.
105、I expect this ongoing optimization of capital alloca-tion to lead to a more dynamic corporate sector in Japan.The biggest long-term problem for the Japanese economy remains demo-graphics.Shinzo Abes government suc-cessfully promoted both greater female labor force participationwhich rose Japans Labo
106、r Market Remains Extremely TightExcessInsufficient-60-45-30-200908070605TANKAN Survey of Enterprises,Employment Conditions(%)Actual ResultForecastAs of September 2023Source:Bank of Japan,Haver Analytics50%of All Stocks in the TSE Traded Below 1x Book at the End of 20
107、2202004006008001,0001,2001,40000.50.5111.51.522Histogram of Distribution of Price-to-Book Ratios for Members of the Tokyo Stock Exchange(Frequency)As of 31 December 2022Source:FactSetGlobal Outlook 20241210 percentage points since 2013 for women aged 15 to 64and increased immigration on the margin.W
108、hile these moves helped,immigration remains far lower than it would need to be to ensure long-term stabilization of inflation and growth.It is notable that GDP per capita in Japan has grown in line with that of the United States over the last decade,but with a rapidly shrinking population,Japans tot
109、al GDP continues to decline,especially in US dollar terms given the depreciating yen.GeopoliticsThree geopolitical hotspots are likely to remain focal points into 2024:Russia-Ukraine,Israel-Hamas,and China-Taiwan.The Russia-Ukraine conflict has already shown that it can dis-rupt global markets,and I
110、 expect it to extend well into 2024 as the Ukrainian counteroffensive appears near an end,due to the approaching winter and concerns over the reliability of Western funding and artillery.Time is on Russias side given the quanti-tative advantages of a much larger economy,population,and store of weapo
111、ns,not to mention the ability to produce more weapons in a secure homeland.While a negotiated settlement is likely the only way to end the war,both sides remain far from the point of agreeing to capitulate on their grand designsthat is,for Russia to control all of Ukraine and for Ukraine to control
112、all of its sovereign territory.The conflict between Israel and Hamas is already a humani-tarian tragedy,both in terms of the barbaric terrorist attack by Hamas that murdered over 1,400 civilians,and increasingly,the Israeli efforts to eliminate Hamas in the confines of a densely populated territory
113、where thousands of innocent civilians have already died.To date,the conflict has not spread beyond Israel and Hamas other than skirmishes on the northern Israeli bor-der with Hezbollah and isolated incidences in the West Bank between Israeli settlers and Palestinians.The more combustible situation w
114、ould be expansion to include states such as Iran.This could spiral into a regional conflict with global economic and military implications.Any escalation that involves Iran would likely also encroach on the safe transit of energy supplies through the Strait of Hormuz through which about 20.5 million
115、 barrels of oil per day(20%of global supplies)are shipped.Any threat to this vital shipping lane could have dramatic global economic consequences.In the near term,all partiesIran,the United States,and Isra-elhave strong incentives to keep the conflict limited.While the humanitarian impact will be de
116、vastating both in Gaza and for victims of terrorism in Israel,I think it unlikely that there are major market impacts in the short term.Finally,the most economically consequential geopolitical ten-sions relate to China.The friction between China and the West is multi-faceted,with Taiwan as a near-te
117、rm focal point.Early 2024 Taiwan elections will set the stage for the rest of the year.The Democratic Progressive Party(DPP)is currently well ahead of the Female Labor Force Participation Continues to Rise,Increasing Labor Supply4050607080232029996939087848178757269Female Labor Force Part
118、icipation(%)Females,aged 15+Females,aged 15 to 64 As of September 2023Source:Haver Analytics,Ministry of Internal Affairs and CommunicationGlobal Outlook 202413more Beijing-friendly Kuomintang(KMT).A DPP victory would likely escalate tension with Beijing as the DPP is seen as favoring a formal decla
119、ration of independence,a red line for the Chinese government.Chinese air incursions into Taiwans air defense identification zone(ADIZ)in-creased from 380 in 2020,to 972 in 2021,to 1,737 in 2022,and to 1,476 through 30 October 2023.As Chinas military in-creasingly agitates the island state and other
120、neighbors in the South China Sea,support for arming and defending Taiwan has increased in the United States.One key risk in the region is that China has to date refused to establish military hotlines or other measures to avoid escalation,as the Chinese leadership fears that fa-cilitating such commun
121、ication almost encourages future US intervention.As such,the world will watch the results of the February Taiwanese elections care-fully for signs of whether the situation might escalate further,or head in a more benign direction.One clear impact of both direct com-petition between the US and China
122、and Chinas ambitions over Taiwan is sup-ply chain fragmentation.Trade tariffs and barriers,combined with concerns over supply chain disruptions during the pandemic,have led more advanced economies to pursue“friendshoring”or“nearshoring”strategies.These plans are proving more difficult than policymak
123、-ers might have envisioned,given inertia around supply chains and the challenge of cultivating the necessary skills among workers in new locales.Still,geopoliti-cal tension is contributing to economic fragmentation which,at least in the short run,may dampen global growth and con-tribute to inflation
124、ary forces.ConclusionThe past five years have upended econ-omies globally,as the pandemic re-sulted in unprecedented monetary and fiscal stimulus policies,followed by de-cades-high inflation,and the sharpest monetary policy tightening in 40 years.The riskiest geopolitical circumstances in decades co
125、mpounded this sense of upheaval.The outlook is not rosy,but its also not bleak.Disinflation is underway and developed market central banks have likely finished their rate hike cycles.In our view,while rate cuts are not imminent,the next leg of this cycle will likely be policy easing.As economies rec
126、alibrate to higher inter-est rates,growth will normalize,but the operating backdrop will not return to one of zero rates and persistently low infla-tion.Instead,companies and investors will likely have to adapt to a new oper-ating environment in which fundamen-tal analysis will regain prominence aft
127、er years of negative real interest rates led to macro assumptions trumping compa-ny-specific factors.With the added dimension of geopolitical uncertainty,executives and investors will also likely need to seek expert advice on how to navigate risks and opportunities that dont lend themselves to free
128、cash flow models,but instead are more at home in a tail-risk stress test.Structural economic and geopolitical inflections are unsettling,but they may also create op-portunity for the executives and investors who recognize the shifting landscape and prepare for the new backdrop.2024 might present jus
129、t this opportunity.Geopolitical tension is contributing to economic fragmentation which may dampen global growth and contribute to inflationary forces.Global Outlook 202414Important InformationPublished on 9 November 2023.This content represents the views of the author(s),and its conclusions may var
130、y from those held elsewhere within Lazard.These materials have been prepared by Lazard for general informational purposes only on a non-reliance basis and they are not intended to be,and should not be construed as,financial,legal,or other advice.In preparing these materials,Lazard has assumed and re
131、lied upon the accuracy and completeness of any publicly available information and of any other information made available to Lazard by any third parties,and Lazard has not assumed any responsibility for any independent verification of any of such information.These materials are based upon economic,m
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