Fathom’s Global Outlook, Spring 2024 was finalised and distributed to clients in early March. This note briefly outlines our analysis and the thinking that underpins it. The latest global data suggest that the pandemic is now in the past and normal service is resuming. The convulsion in growth has subsided and the upheavals in inflation and interest rates are past their peak. But clearly some economies did better than others. The major developed economies are converging towards their post-GFC trend rates of economic growth, but only the US shows strong signs that it has the momentum to go above its post-GFC trend. Other countries are slower, while the UK’s convergence appears to be stalling.
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There are many reasons behind the US outperformance: some are specific to its response to the economics of the COVID crisis, but others are rather more dyed in the wool. Corporate America’s knack of not only innovating but also ensuring it reaps the benefits of breakthroughs — reflected in the strong positive association between past R&D and future sales growth — is a major contributor to its outperformance. For the US’s R&D-intensive peers, that association is either non-existent (UK and China) or weak (Japan). This superior corporate innovative ability has helped the US economy to pull away from the rest since the GFC, and continues to do so after the pandemic.
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Fathom’s central scenario foresees a return to pre-CO|VID growth and less economic drama overall, but risks do remain. The resilience of US economic activity despite an aggressive tightening cycle has gone hand in hand with a recovery in consumer confidence and bullish sentiment in markets overall. However, positive economic fundamentals can cross the line and become damaging if they ‘overheat’. Consumer confidence is closely tied to inflation, and the recent impressive recovery in confidence threatens a risk scenario where consumers ‘make up for lost time’ after the pandemic: instead of spending the excess savings they built up slowly and evenly across many years, they spend them in a hurry. That would drive growth above trend, reignite inflation, cause rates to rise again and lead, eventually, to another recession, as the vulnerability of the financially constrained, over-leveraged tail of the corporate sector in the US is revealed. Corporate America has raised relatively high levels of debt on the back of its book equity, and this has the potential to backfire if a consumer-led spending surge does lead to a resurgence of inflation; the higher-for-longer rates that would inevitably follow would expose the vulnerability of the most financially constrained, over-leveraged firms.
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The risk of overheating would potentially be very sensitive to the political stripe of the next administration in the White House. When there is a Republican in the presidential office, corporates tend to pay less tax on average, even if (as under George W Bush) the headline tax rate remains unchanged. A likely move by a future Trump administration would be to cut the tax rate, which would boost growth even further in the short term, but also increase the risk for over-leveraged firms struggling to pay their debt interest charges. However, politicians have been known to change their rhetoric swiftly — Mr Trump may choose a different approach to boost growth.
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Another risk comes from geopolitics, where current tensions and conflicts may present a downside risk to growth and asset prices. Russia’s invasion of Ukraine drags on, as does the conflict in Gaza, and there is an ever-present risk of escalation in both cases. VIX, the main measure of market volatility, has been known to rise by as much as 40 percentage points and fall by up to 18 percentage points within the first ten days of a conflict starting.
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These were the themes that Fathom picked, after extensive research, as the main drivers of the outlook for the near- to medium-term. There are many ways to monitor their evolution, and more importantly which starts to dominate or fade. One easy way, as we outlined in ‘Banks: the canary in the coal mine’, is to keep an eye on banks: they continue to be a source of direct vulnerability and as such perform the valuable role of early warning signal for economic malaise, which tends to manifest itself in their balance sheets and asset prices. Or, one can subscribe to Fathom’s outlook service to gain access to rigorous monitoring of opportunities and threats and the overall gyration of economies. Meanwhile, LSEG clients will soon be able to access charts and analysis from Fathom’s Global Outlook, Spring 2024 in the Chartbook.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
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