This year, which is coming to an end, has been a difficult year for Western countries. That's because major central banks have tightened monetary policy much more than previously expected, given the very stubborn inflation that prevails.
Interestingly, however, the impact of these tight monetary policies on growth has been limited, and both the US and the euro area, especially the former, have avoided recession.
In Asia, China underperformed in terms of growth compared to very positive expectations emerging from the COVID-19 pandemic. However, many Asian economies, including not only India but also Japan, showed excessive performance.
Beyond short-term trends, 2023 was a critical year in terms of the increasing fragmentation of the global economy. The United States has sharply cut imports from China, and foreign direct investment into China has slowed, shrinking significantly in October.
Another interesting difference in the world economy concerns inflation. While Western countries experienced very high inflation in 2023, inflation in Asia remains much more subdued. An extreme example is China, which is approaching the end of the year with deflation in consumer and even wholesale prices.
This, along with capital controls, allowed the People's Bank of China to follow its own needs in terms of monetary policy cycles, allowing it to lower interest rates slightly rather than raise them like other countries around the world.
A significantly different inflation environment could also encourage fragmentation, as China has become more competitive not only on prices but also on weak exchange rates.
The scenario for 2024 is likely to be very different. That's because the disinflationary forces in the West have been going on for months and should continue, with both the US and the eurozone on track to hit their inflation targets by the end of 2023.
This means the US Federal Reserve and the European Central Bank should have the room they need to cut rates fairly quickly, perhaps 150 basis points in the first quarter and 125 basis points in the second quarter.
Reducing financing costs should not only help avoid a hard landing, but also help households restore purchasing power, and real disposable income should rise as inflation falls.
At the same time, China's economy will continue to slow from growth of about 5.2% in 2003 to 4.5% due to limited fiscal and financial support. Meanwhile, India will continue to shine with 7% growth in 2024, a key election year for the country. This means that the reorganization of supply chains from China to other high-growth countries, especially India, will continue.
Still, China's return to competitiveness through deflation and a weaker renminbi, along with industrial policy and innovation, should be positive in terms of moving up the ladder and becoming a very powerful industrial power. This in itself could trigger a further wave of trade fragmentation, as countries react to the influx of Chinese goods, perhaps through protectionism.
Overall, 2024 will be the year when central banks' key policy rates start to fall, thanks to falling inflation. Rising real incomes, in particular, are likely to lead to a soft landing for the US and the euro area, while China continues to make a fair contribution to global economic growth, although it continues to slow.
Beyond these general macro trends, there are other important trends moving towards the fragmentation of trade and investment. Geopolitics is behind this trend, but it is not the only factor. The reality is that supply chain restructuring is occurring, albeit for different reasons and at different speeds.
Finally, this fairly positive scenario comes with some risks, including geopolitical ones. Good examples are not only the US and Taiwan elections, but also the complications of the ongoing wars in Ukraine and Gaza.
Alicia GarcÃa Herrero is Natixis' Chief Economist for Asia Pacific and a Bruegel Senior Fellow.
