This means that mean-reversion (with the mean around 1 to 2 per cent) to a steady inflation regime remains elusive.
Simply put, it is difficult to see a return to a regime where central banks were trying, and failing, to stoke some inflation.
Instead, much like the 1970s, we are looking at inflation in waves.
With that in mind, the consensus moves towards moderate stabilisation at levels around 2.5 to 3.5 per cent in 2024.
Deficits will persist, and debt will continue to climb
Global debt to GDP is 340 per cent, nearly 120 per cent higher than it was two decades ago.
Despite high levels of GDP and interest payments exceeding output growth, many countries have opted to maintain high levels of fiscal spending to mitigate the effects of the economic slowdown. The OECD has already issued a warning that the trend may not be sustainable.
We are reaching levels where debt is issued to pay for debt, a process that is self-accelerating. At some point fiscal restraint is necessary, pushing countries towards primary deficits; the economic slowdown precludes a return to fiscal prudence at least in the next few months.
China will rebound
Although the scenarios vary, we believe that China will see the smoothing of its real estate market crash and a slow return towards growth normality.
Economic growth, much of which is still manufacturing-based, is already somewhat rebounding, which can be corroborated by improving industrial data in Asia and other sources.
Additionally, the government and central bank have been stimulating the economy for the past few months, which should translate into improved consumption in the near future.
Having said that, geopolitical fragmentation brings a slow removal of China from the heart of the global supply chain, which should have some significant repercussions in terms of trend growth.
This geopolitical shift should cap the economic rebound somewhat in 2024, but overall we think the year will be a better one for the world’s biggest manufacturer and second-biggest economy.
The dollar will remain the world’s reserve currency
Despite efforts to dislodge the US dollar from its natural perch at the top of the global currencies food chain, the greenback will remain the world’s choice as a global reserve in years to come.
Despite China amassing gold reserves and some deals in Asia to trade commodities in local currencies, China and other economies still hold huge amounts of dollar reserves.
Reducing that number abruptly creates a supply problem for all other currencies.
If the dollar’s value were to lower due to massive de-dollarisation, then the value of most countries’ reserves would drop dramatically.
In behavioural terms, the stability of the dollar is still deeply ingrained within consumer mentality.
George Lagarias is chief economist of Mazars Wealth Management
