Citi Chief Global Economist Nathan Sheets is concerned about a potential global economic slowdown, despite the unexpected momentum that drove the S&P 500 to close above 5,000 for the first time ever. Sheets notes that central banks were vigorous with rate hikes throughout 2023, which slowed the global economy but not as sharply as expected. He warns that headwinds persist from tighter policy and is keeping a close watch on how banks restricting credit to households and firms unfolds. Despite this, Sheets observes that markets have remained resilient so far, with equity markets rising to extraordinary levels.
Looking ahead to 2024, Sheets believes that central banks will likely reduce the amount of policy restraint, as long as inflation continues to dissipate. However, he cautions that this is contingent on ongoing progress with inflation, particularly in the area of high-wage growth and rapid services inflation. Sheets acknowledges the risks of aggressive tightening moderating growth, but emphasizes that financial stability risks remain a concern.
In conclusion, Sheets is closely monitoring the tightening of financial conditions resulting from higher rates, and how that will impact consumption and investment in the broader economy. He notes the resilience of the equity market in the face of rate hikes, which has supported consumption through stronger balance sheets and wealth effects. Despite signs of restraint, Sheets remains cautiously optimistic about the potential easing of monetary policy in 2024, dependent on ongoing progress with inflation and the determination of central banks to avoid recession.
