In a recent report entitled ‘The Good, the Bad, and the Optimistic,’ PwC paints a more optimistic picture of the UK economy in 2024 compared to a year ago. Chief economist Barret Kupelian forecasts the UK as the fourth-best performing economy in the G7, with real GDP expected to rise by approximately 2.7% compared to 2019. This projection, accompanied by predictions of inflation returning to normal levels and improved real incomes, aligns with a general consensus that the US economy is heading for a ‘soft landing.’
Consumer sentiment is expected to rise as low-income households benefit from the increase in the national living wage and a slowdown in food and energy inflation. However, PwC’s report also acknowledges challenges, such as rising average rents in London and an anticipated increase in business insolvencies, particularly in hospitality, manufacturing, transport, and storage sectors.
On the other side of the Atlantic, The Wall Street Journal issues a cautionary note, highlighting the risks associated with the prevailing consensus on a soft landing for the US economy. The article underscores the discomfort of being in a crowded trade, emphasising the potential market punishment if the consensus turns out to be wrong.
Investors are navigating an environment where both bonds and equities appear to be priced for a scenario aligned with the consensus. Bond yields have fallen, and equity valuations, especially for top-tier US stocks, have surged, banking on the Federal Reserve’s anticipated rate cuts by March. The rapid shift from Extreme Fear to Extreme Greed in just two months raises concerns, particularly considering the inaccuracies of similarly strong consensuses in the past three years.
The overarching risk, as identified in The Wall Street Journal, lies in the downside, even if the US achieves a soft landing. The article suggests that so much positive outcome has already been priced into the market that potential gains from aligning with the consensus might be limited.
As we navigate the uncertainties of 2024, investors are urged to remain vigilant, recognising the potential impact of unforeseen events on economic forecasts. The key lies in balancing optimism with a prudent assessment of the risks at hand, understanding that in the dynamic world of finance, surprises can emerge where least expected.
What are your thoughts on the contrasting economic views presented by PwC and The Wall Street Journal? How do you perceive the potential market risks in the coming year?