2024 ushers in a Goldilocks economy as coronavirus disruptions finally recede
2024 is coming to an end, and it’s proven to be a pretty good year for economies, especially the United States.
As the distortions caused by the coronavirus pandemic finally recede, data suggests that major economies are back to normal and in a sort of Goldilocks state — not too hot, not too cold.
The labor market has softened, but overall remains healthy
Where this phenomenon is most evident is in the labor market.
Over the past few years, we’ve seen two extremes in the labor market—a huge spike in unemployment early in the pandemic (see chart below), and then historic tightness in the labor market as the economy reopened and workers were in short supply.
Unemployment rates have risen in the United States (dark blue line), Canada (red line), Sweden (light blue line) and the United Kingdom (green line) over the past year or so, after several consecutive years of rising central bank interest rates. But they’re only up to where they were during the last (2010s) economic expansion, so the labor market is now mostly back to normal or just a little tight, but not historically.
Global inflation returns closer to 2% target
Weakness in the labor market will also help inflation return to normal.
Initially, we saw inflation rise during the pandemic due to supply chain disruptions, which pushed up the prices of commodities, energy and food. Then, when the economy reopened, we saw labor shortages and we also experienced wage increases, and it took a few years for wages to return to normal.
As a result, overall inflation in major economies is almost back to around 2% as supply chains stabilize and wage growth slows (see chart below).
Despite rising interest rates, GDP growth remains strong enough to avoid recession
The main tool used by central banks to control inflation is to raise interest rates.
Somewhat surprisingly, they succeeded in cooling the economy enough to reduce inflation, but not severely enough to cause a recession (although, in some countries, this was a close call).
This is especially true in the United States, where the unemployment rate is 4.2%, the inflation rate is 2.3%, and the real GDP growth rate is close to 3% (below, light blue bar). This puts the United States on track to have one of the highest growth rates among developed economies (blue and yellow bars).
As interest rates continue to fall through 2025, this should help boost economic growth
With inflation back under control, major central banks will be able to shift their focus to boosting economic growth this year by cutting interest rates.
The Bank of Canada and Sweden’s Riksbank have each cut interest rates by 125 basis points this year. The Federal Reserve (red line in the chart below) and the European Central Bank (blue line) both cut interest rates by 75 basis points, and are expected to cut interest rates further later this month. The Bank of England has cut interest rates by 50 basis points (green line).
More cuts are expected next year (lighter green, red and blue lines).
These rate cuts should help support growth in 2025 as they will make borrowing cheaper for consumers and businesses, boosting economic demand. That’s why some expect economic growth to be generally stronger in 2025 than in 2024.
If the economy grows and people spend, that should increase the company’s revenue…which is good for the market.
The above information is for informational and educational purposes only, and nothing contained herein should be construed as investment advice representing a specific security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or makes any statements regarding the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq-proprietary indices are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should conduct their own due diligence and carefully evaluate a company before investing. It is strongly recommended to seek the advice of a securities professional. © 2024. Nasdaq, Inc.
