With leading indicators still in contractionary territory, slowing economic growth is expected to prevail in 2024. But easing inflation and less tight monetary policy should boost consumer spending and investment. Respondents are more positive about the economy than they were in March 2022. But geopolitical instability and transitions of political leadership remain major risks to growth.

Global Economic Outlook

The global economy is navigating some challenges but appears to be on track for a soft landing. Despite a deceleration in China and the US, global GDP growth is forecast to be just above 3% this year and next. Stubborn services inflation persists but is expected to fall, leaving central banks with room for gradual policy easing.

In the developed world, growth is sluggish as the impact of tighter monetary policy takes hold and as post-pandemic tailwinds fade. However, labor markets have remained resilient and real household income is rising in some advanced economies. In contrast, EMDEs face a harder slog as higher debt and financing costs weigh on growth.

With a limited number of recessions recorded over the past century, avoiding one is now considered to be a key tenet of risk management. In our view, an EMDE recession is unlikely but the likelihood of an end to this expansion is growing. Avoiding a sharp downturn may require a substantial slowdown in risk assets and a reversal of recent policy tightening.

Europe

As we enter 2024, Europe looks set to trudge along its current path. Consumers’ purchasing power remains squeezed by inflation and restrictive monetary policy, and savings remain elevated as interest rates rise. In addition, fiscal consolidation is under way, resulting in a subdued outlook for domestic demand.

Despite these pressures, the eurozone has not entered recession and a recovery is likely in 2024 as a result of lower energy- and core inflation, a decline in savings, and less tight monetary policy. However, the recovery will be muted because of a restraining impact from slower growth in China, slower foreign demand, and higher labor costs in many countries.

Against this backdrop, executives in the McKinsey Global Survey report that their views of their own economies have turned more positive than last quarter. They highlight the importance of focusing on resilience, flexibility, and innovation to thrive amid persistent uncertainties. However, geopolitical tensions and political transitions remain the most-cited threat to their businesses’ prospects.

Asia-Pacific

As we enter 2024, global economic growth is moderating, but risks remain. Nevertheless, we see reason for optimism that a global recovery may be underway and that inflation is finally tamed. This outlook would bolster investor confidence and allow central banks to gradually ease policy.

In Asia EMs, solid domestic demand growth and a pick-up in exports support our view that the region can remain a bright spot despite challenging geopolitics and trade dynamics. Nonetheless, China’s lackluster economy can have spillover implications for closely-linked economies, including Hong Kong and Singapore.

We have lifted our forecast for East Asia’s growth to 4.6 percent in 2024 and 4.7 percent in 2025, led by semiconductors and goods benefiting from artificial intelligence. We also are increasing our long-term allocations to South Korean and Taiwan equities, supported by structural tailwinds and close correlations with China. We believe these countries can provide a hedge against rising U.S. rates and the impact of an emerging China slowdown on global trade flows.

North America

While economic growth in the region is expected to be modest, a benign inflation environment and labor markets remain resilient. Meanwhile, the Bank of Canada is likely to ease policy in 2024, limiting the impact on exports.

Widening geopolitical tensions and the risks of a prolonged period of monetary tightening continue to weigh on global prospects, with growth below pre-pandemic levels in most advanced economies. In addition, renewed inflationary pressures could be fueled by the steep rebound in oil prices.

Among respondents in North America, the risk of political instability and conflict rose to the top perceived threat. This was followed by the risk of a disruption to supplies of critical goods or services and the risk of higher energy and food prices. In comparison, the risks of a recession and of lower business investment were cited less often this quarter. This is partly a reflection of the fact that more than 60 countries will hold elections in 2024, which may add to uncertainty about future policy direction and economic performance.