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2023 was a year full of challenges and changes. Looking back on this year, in order to curb the high inflation, the Federal Reserve continued to raise interest rates, pushing the interest rate to the highest level in 22 years. The strong tightening of the Federal Reserve has brought negative spillover effects to the global economy, and the risk of economic downturn has increased.

However, at the last interest rate meeting in 2023, the Federal Reserve officially released a "dovish" signal, and the market began to gradually digest the expectation that the Federal Reserve and other major central banks will start to cut interest rates as early as the first quarter of next year.

Looking forward to 2024, will the previous tight monetary policy further impact the global economy? In the face of the uneven and fragile recovery in the post-epidemic era and stubborn inflation, what kind of situation will the global market development present? What kind of opportunities and risks will the expectation of loose monetary policy bring to risk assets and emerging markets?

National Business Daily (hereinafter referred to as NBD) interviewed Torsten Slok, Chief Economist of Apollo Global Management, and Aninda Mitra, head of Asia Macro and Investment Strategy at New York Mellon.

NBD: In your opinion, what are the main challenges facing the global economy in 2024? What are your expectations and outlook for the global economy next year? Can the global economy avoid a "hard landing"?

Torsten Slok: Overall, the challenge facing the global economy next year is that the impact of long-term high interest rates in developed countries on consumers, companies, and banks will gradually emerge.

We expect the global economy to slow down next year, and developed countries will face the risk of economic recession. The reason behind this is that inflation remains high, so interest rates will remain high for a long time. However, the Asian economy will still remain strong next year and will be immune from the impact of the global economic recession.

Aninda Mitra: Our basic forecast is that by 2024, the differentiation of the global economy will continue. Under this macro scenario (we think the probability is 50%), inflation in some major global economies will fall. The United States and Japan are more likely to experience a so-called "soft landing", but the euro zone and the UK have already begun to fall into a potentially longer-term economic slowdown. (Note: Economic soft landing refers to a smooth fall back to a moderate growth range after the economic cycle enters a downward phase, without causing large-scale deflation and unemployment.)

We have recently reduced the probability of a "inevitable recession" in the global economy to 40%. After the destruction caused by the COVID-19 pandemic, the normalization of supply-side drivers will play a greater role in achieving the 2% inflation target.

NBD: Globally, the inflation of many economies has peaked in the autumn of 2022. In the case of generally better than expected economy, the inflation of these economies still shows a downward trend in 2023. In your opinion, will the inflation of the main developed markets continue to normalize next year and move closer to the 2% target of the major central banks? Why?

Torsten Slok: Since the autumn of 2022, global overall inflation has been steadily declining, mainly due to interest rate hikes, falling food and energy prices, and the gradual normalization of the supply chain. As the global tightening monetary policy continues to play a restrictive role, overall inflation will continue to normalize, but this requires a certain amount of time, and the "last mile" of central banks' fight against inflation will often be the most difficult.

Aninda Mitra: In fact, we doubt whether there will be a "perfect disinflation (immaculate disinflation)" scenario next year, that is, the inflation of all major economies quickly drops to the 2% target level without causing any loss to economic output. The probability of this scenario is only 10%.

We believe that it will take more time for inflation to return to the 2% target level, mainly because: the growth rate of nominal and real wages is still higher than the usual 2% inflation; the labor market in the United States and Japan is still quite tight, which can be seen from the job vacancy survey. This will cause most central banks in developed countries to be more hawkish than the increasingly moderate market expectations.

We believe that the global economy will slow down in 2024, which may put inflation on a downward "slide" and move closer to the 2% target of the major central banks. However, except for the euro zone, we expect that other economies will not reach the 2% inflation target next year, unless there is any unexpected economic downturn.

NBD: If the inflation of the main developed economies continues to decline next year, according to the "Phillips Curve" theory, this will put upward pressure on their unemployment rate, will this make these economies face risks again?

Torsten Slok: Yes. Because the lag effect of monetary policy will have a negative impact on the economy, the unemployment rate will also rise over time, so even if inflation continues to fall, these developed economies will not overheat.

Aninda Mitra: Throughout 2024, the risk of a "non-linear trade-off" between inflation and unemployment will indeed rise. Most developed economies are currently dealing with the lagging effects of policy tightening, and the actual policy interest rate has turned positive and has reached a new high since around 2005. This means that although the setting of restrictive monetary policy is reasonable, most central banks must be flexible to respond, and any policy adjustments in the later period may eventually exceed the current market expectations (global monetary policy may soon be relaxed).

NBD: At present, the market generally expects that the major central banks led by the Federal Reserve will enter a rate cut cycle in 2024. If the main central banks really start to cut interest rates next year, making the financial environment loose, what does this mean for the global economy?

Torsten Slok: If the main central banks start to cut interest rates, this will have a positive impact on the global economy, risk assets, and developing countries.

Aninda Mitra: We believe that the peak of the policy interest rate and monetary easing means that the dollar will show a trend from stability to weakness, which also means that long-term interest rates will go further down. It is certain that the slowdown in developed markets and the rise in actual borrowing costs will affect weak corporate credit.

However, outside of developed countries, the peak of US interest rates and the dollar should ease the global financial situation and create conditions for a rebound in risk assets. However, the main risk associated with this is that if the pace of interest rate cuts by central banks such as the European Central Bank is earlier or larger than the market expects, this may cause the dollar to strengthen again.

NBD: Because the market has begun to expect the Federal Reserve to cut interest rates next year, the dollar has recently fallen from its high. If the Federal Reserve really starts to cut interest rates next year, what impact will the fall of the dollar have on emerging market assets? What opportunities and challenges will emerging markets face next year?

Torsten Slok: The Federal Reserve's interest rate cut means the peak of the dollar and the positive prospects of emerging markets, because this will make the imported goods of emerging markets cheaper and cheaper, trade more balanced, and capital flows will help the financial system of emerging markets and stimulate economic growth.

However, there are also challenges. In addition to geopolitical uncertainty and inflation (for example, food and energy prices are becoming more and more expensive), high interest rates maintained by developed economies for a long time are also a major risk to emerging markets.

Aninda Mitra: The market never guarantees anything. But overall, we are optimistic about the prospects of most emerging markets in 2024. These markets have withstood the impact of the Federal Reserve's large-scale tightening of monetary policy. Many emerging markets (such as the ASEAN Five, India, and Mexico) also benefit from the slowdown to stable rotation of the global supply chain, which has prompted more foreign capital inflows and boosted employment and economic growth.