REUTERS/Eduardo Munoz
- 2024 is set to be another tumultuous year, Harvard economist Kenneth Rogoff wrote in Project Syndicate.
- High interest rates will become a global norm, driven by factors such as excessive debt and deglobalization.
- Meanwhile, investors can expect developments in China and Japan to remain key concerns through 2024.
Economies around the world managed to avoid most of the economic traps laid out through 2023, with the US circumventing a recession and developing markets forestalling a debt crisis, Kenneth Rogoff — an economics professor at Harvard University — wrote for Project Syndicate.
But although the worst-case scenarios have been avoided to date, 2023 started a tumultuous trend that may extend into the new year.
"This is especially true for emerging markets, but don't be surprised if 2024 turns out to be a rocky year for everyone," the former IMF chief economist wrote.
Detailed below are Rogoff's four key themes to watch out for.
(1) Higher-for-longer interest rates
Investors should let go of any hopes that interest rates ever return to the ultra-low levels that preceded 2021, Rogoff wrote.
Even if global rates were driven down substantially by a US recession in the next year, this would only offer temporary relief, given a slew of factors that would eventually push interest up. These include excessive debt, rising deglobalization, populism, increased defense spending, and the green transition.
(2) More US overspending
Higher interest rates don't bode well for the US, as the country's deficits continue to expand, despite the economy running at full employment. Including President Joe Biden's student-loan forgiveness, the deficit stands at 7%, and its unlikely that Congress elects to cut spending.
"The high cumulative inflation of the past three years amounted to a de facto 10% default on government debt — a one-off event that cannot soon be repeated without severe consequences," Rogoff said.
(3) China troubles
China's tepid post-COVID rebound will extend into another year, as Beijing's measures of support can't hold up the entire economy.
"It will be hard to keep the Chinese economy firing on all cylinders while simultaneously imposing restrictions on new lending," Rogoff explained.
He expects Chinese authorities to continue pushing stimulus and cheap loans to the insolvent sectors that need it, while constraining over-leveraged local governments from fresh borrowing.
Broadly, Beijing will have trouble trying to restore its 5% annual growth rate, with the country's debt-to-GDP hitting 83% for 2023. The nation's overreliance on infrastructure and real estate — which has buckled in the past year — will continue to be a headwind, even as China starts to shift towards electric vehicles and green investments.
(4) Japan
Through 2023, Japan held on to its loose monetary policy, despite the world's hawkish turn. The difference has caused the Japanese yen to spiral nearly 40% against the dollar since 2021, a level that the Bank of Japan cannot continue to ignore, Rogoff said.
"While Japanese policymakers may prefer to sit on their hands and hope a decline in global interest rates will boost the yen and solve their problems, that is not a sustainable long-term strategy," he wrote.
If the country doesn't start to lift interest rates, domestic inflation will begin to creep up, a major red flag for a country with a debt-to-GDP ratio of over 250%.
Previously, economists such as Mohamed El-Erian have warned that a mishandling of Japanese policy could cause a "financial accident" to ripple across the global economy, as many investors have profited off the yen's low level.