Like a plane waiting to land at Heathrow Airport after being diverted for the hundredth time, so too have markets had their own version of waiting for a landing. In the case of markets, the all-encompassing question is whether this central bank tightening cycle will end in a recession (hard landing) or will they manage to walk their so-called fine line and return inflation to target without tipping the world economy into recession (soft landing)?
History tells us the chances of a soft landing are low (~10%) but this pandemic induced inflation breakout hasn’t played by the usual rules, with consumer spending and house prices resilient in the face of a tidal wave of rates pain.
Optimism that this time will be different is reflected in the rally in global equity markets in November and December, with a collective amnesia of the bank failures and bond yield spikes earlier in the year ensuring that we ended 2023 with markets priced for perfection.
As we shift our attention to 2024 and the years ahead, we see an economic environment that is characterised by elevated uncertainty. The tides have shifted, the current backdrop is one driven by ascending interest rates for the first time in half a century, heightened inflation, the retreat of globalisation, escalating geopolitical tensions, and the ominous emergence of multiple conflicts between major powers.