Whether most advanced economies will have a soft or bumpy landing depends on several factors. For starters, monetary-policy tightening, which operates on a lag, could have a greater impact in 2024 than it did in 2023. Moreover, debt refinancing could saddle many firms and households with substantially higher debt servicing costs this year and next. And if some geopolitical shock triggers another bout of inflation, central banks will be forced to postpone rate cuts. It would not take much escalation of the conflict in the Middle East to drive up energy prices and force central banks to reconsider their current outlook. And many stagflationary megathreats over the medium-term horizon could push growth lower and inflation higher.
Then there is China, which is already experiencing a bumpy landing. Without structural reforms (which do not appear forthcoming), its growth potential will be below 4% in the next three years, falling closer to 3% by 2030. Chinese authorities may consider it unacceptable to have actual growth below 4% this year; but a growth rate of 5% simply is not achievable without a massive macro stimulus, which would increase already high leverage ratios to dangerous levels.
China will most likely implement a moderate stimulus that is sufficient to get growth slightly above 4% in 2024. Meanwhile, the structural drags on growth—societal aging, a debt and real-estate overhang, state meddling in the economy, the lack of a strong social safety net—will persist. Ultimately, China may avoid a full-scale hard landing with a severe debt and financial crisis; but it likely looks like a bumpy landing ahead, with disappointing growth.
The best scenario for asset prices, stocks, and bonds is a soft landing, though this may now partly be priced in. A no-landing scenario is good for the real economy but bad for equity and bond markets, because it will prevent central banks from following through with rate cuts. A bumpy landing would be bad for stocks—at least until the short, shallow recession looks like it has bottomed out—and good for bond prices, since it implies rate cuts sooner and faster. Finally, a more severe stagflationary scenario is obviously the worst for both stocks and bond yields.
For now, the worst-case scenarios appear to be the least likely. But any number of factors, not least geopolitical developments, could be this year’s forecast spoiler.
Nouriel Roubini, professor emeritus of economics at New York University’s Stern School of Business, is chief economist at Atlas Capital Team, CEO of Roubini Macro Associates, co-founder of TheBoomBust.com, and author of Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022). He is a former senior economist for international affairs in the White House’s Council of Economic Advisers during the Clinton Administration and has worked for the International Monetary Fund, the U.S. Federal Reserve, and the World Bank. His website is NourielRoubini.com, and he is the host of NourielToday.com.