Welcome to our year-end review of key economic and financial developments! As we wrap up 2023, it’s been quite a year with cooling inflation, shifting monetary policies, and mixed signals on jobs and growth – but ending on a relatively high note.
Let’s start with the good ol’ US of A before we venture abroad:
United States: Consumers Close Out 2023 With a Bang
Retail sales in November were better than expected – up 0.8 per cent compared to the last month! And when you strip out autos and gas? An even stronger +1.0%. After a year of high inflation putting a damper on real incomes, it seems lower prices have restored some shopping mojo.
Consumer spending on goods like online shopping and electronics saw robust increases
This tops off previous reports showing moderating inflation and strong job growth, all pointing to resilience in the US economy. The average American still faces uncertainty heading into 2024. But the final economic reads of this year let some holiday cheer set in.
Inflation Still on a Downward Track
On the inflation front, the annual change in the Core PCE Price Index in the United States for November 2023 was reported to be 3.16%, a decrease from 3.39% in October of the same year.
Used car prices dropped 2.5% in November, which is huge considering how much they had run up earlier in the pandemic. New vehicle prices finally seem to be catching up to chip shortages. Black Friday discounts were the deepest since pre-pandemic, signalling retailers are finally breathing easier on margins.
This gives the Fed confidence to slow their aggressive rate hike path as the desired cooling sets in across large parts of the economy. The question now turns to how persistent these trends will be in 2024.
Job Gains Broad-Based To Close Out 2023
- Health care added 46,000 jobs, with nursing homes and ambulances leading the charge
- Construction gained 20,000 roles across residential and non-residential projects
- Even manufacturing, hammered by higher rates and a strong dollar, saw a modest rise of 14,000, boosted by auto sector gains
This builds on improved readings across a range of labour metrics:
- Quits rate declined for the 5th straight month in October
- Underemployment dropped 0.4 ppt to 6.7%, matching the pre-pandemic level
- Wage growth remains over 5% annually but is slowly cooling from earlier spikes
All are pointing to a still-strong job market despite tighter Fed policy and fears of an impending recession from the gloomy crowd.
Next week brings the marquee nonfarm payrolls to close out the year. Look for unemployment to hold near historic lows absent winter layoffs.
Key things we’ll be watching in US data to kick off 2024:
- December nonfarm payrolls and wage growth
- PMI surveys for manufacturing and services
- Personal income and spending data for November
- And home price indexes for signs of a bottom
International Scene: Central Banks Staying Vigilant
It wasn’t just the Fed taking action on rates in December. Global central banks realise their inflation fight isn’t quite over yet:
China
- PBOC lowered rates to support housing/growth amid strict COVID policies
- More easing is expected in 2024 if inflation stays tame
Eurozone
- Rates peaked? Markets now expect cuts in late 2023 on growth worries
UK
- BOE went 50bps but sent hawkish signals on further hikes to anchor inflation expectations
- Still more concerned with persistent inflation than recession in 2023
The Road Ahead: We’ll closely monitor China’s latest manufacturing and services PMI data out Friday, along with key policy decisions from Australia to Brazil to kick off January.
Households Feeling the Pinch (or Punch)
Rising interest costs are hitting households right in the wallet. After a decade of ultra-low rates led consumers and businesses to gorge on cheap debt, higher financing costs are starting to bite.
Debt servicing ratios have jumped across advanced economies:
- The household debt-to-income ratio in the Euro area decreased to 89.5% in the second quarter of 2023 from 95.0% in the same period in 2022.
- For the UK in 2023, the government debt-to-GDP ratio varied across different months but was consistently much higher than 14%.
- The 2023-24 Budget projected an increase in gross debt to 36.5% of GDP by the end of the 2026-27 financial year.
The Bottom Line
Inflation threw a loop but seems to be cooling. Job markets remain remarkably resilient despite tighter Fed policies. And while higher rates are squeezing household budgets, the American consumer still has some spunk left for holiday shopping sprees.
There’s uncertainty ahead and more work to get prices and policy back to sustainable levels globally. China’s strict COVID-19 policies continue to disrupt supply chains and growth. In Europe, an energy crisis, war in Ukraine, and a possible recession still loom large.
But the trends seem to be heading in the right direction for a softer landing as we kick off 2024. Assuming the variants stay tame and geopolitical crises don’t explode, there’s room for cautious optimism. The economic fundamentals still feel strong enough to ride out the lingering storms.
