Dutch quant manager, Robeco, has dissed the ‘immaculate disinflation’ narrative, suggesting a darker conclusion to the economic story next year.
In its outlook for 2024, the firm says while 2022 defied expectations, including the Robeco in-house view, of a global recession, rising hopes of a happy-ever-after ending for inflation and employment are likely delusional.
The report notes growing optimism that central banks have done enough to rein in cost-of-living increases without “tanking” economies, citing Federal Reserve forecasts of 2.6 per cent core inflation and 4.1 per cent unemployment.
“A soft landing has become the overwhelming consensus view,” the Robeco outlook says. “… We think this is nothing short of a fairy tale outcome.”
According to the group’s baseline scenario, developed economies will likely stagnate in 2024 while inflation fails to hold below 3 per cent while disinflation morphs into “benign” stagflation in a “highly unstable macroeconomic equilibrium”.
“Ultimately, the bite of longer, higher real rates will trigger a more sinister transition toward 2025 as initial cracks in the labor market propagate into full fracture, with unemployment rising by 1-2% instead of 0.3% as both the Fed and ECB [European Central Bank] envisage for 2024,” the paper says.
Robeco says the likelihood of stagflation, tougher credit conditions, challenging geopolitics and potential disappointing artificial intelligence-linked productivity improvements will make for a less appetising year than the Goldilocks crowd expects.
However, the manager tempers any certainty implied by the baseline forecast with a couple of alternative scenarios at either end of the cold-hot spectrum.
Under best-case conditions, inflation would fall in the 2-2.5 per cent range as earnings rebound and the “bond-equity correlation turns negative again”.
The Robeco bear scenario includes severe stagflation, a “genuine” recession, earnings down by 20 per cent, a credit spread blow-out and icy share markets.