The world's leading investment banks have raised their forecasts for global and U.S. economic growth for the next year in their annual reviews. They consider the probability of a recession to be minimal (10% to 30%, depending on the level of alarmism).
Key Narratives in Investment Reviews and Forecasts
Two main narratives are consistently repeated in investment reviews and forecasts:
- If the economy has successfully absorbed the extreme pace and scale of monetary policy tightening by central banks in the world's leading countries, likely, the cycle of consolidation (in the first half of 2024) and the subsequent easing of monetary policy (from June - July 2024) will be absorbed without major issues. The worst-case scenario, which could have led to a collapse of the debt market and disruption of the debt refinancing mechanism, has been averted.
- The economy's response to the extreme interest rate hikes was relatively mild, and the consequences were almost imperceptible.
Economic Models and Their Assumptions
All the fundamental macroeconomic models, upon which modern economic science is based, assumed a more severe downturn scenario, which could have materialized as early as the end of 2022 (following the initial shock to the credit market).
What's most paradoxical is that the most sensitive and vulnerable sector — the credit market — has hardly felt the consequences of the tightening. There has been no decline in lending (only a slowdown in growth rates) and no significant trend toward an increase in loan delinquencies. All of this is happening in an environment of extremely high levels of over-lending and at record rates unseen in a third of a century.
Furthermore, the pressure on the consumer market is not significant enough to trigger negative trends. High consumer demand, in turn, is supporting investments and driving new orders in the industrial sector.
What's the error in this logical chain? It's the effect of inertia. Specialists and central banks in developed countries were betting on the high risk of a worst-case scenario in financial markets (specifically, the debt and credit markets) and the relatively quick realization of negative events in the economy.
The existing foundational economic models do not take into account the balance ratios of the financial system and the surplus liquidity that has accumulated over 15 years of monetary policy measures. Consequently, the safety margin was directly influenced by this excess liquidity, which allowed for the compensation of imbalances and the prompt closing of liquidity gaps.
Conclusion
In conclusion, the paradox of inertia is a major theme in the analysis of investment banks' annual reviews and the resilience of financial markets. Despite gloomy forecasts and the assumption of a severe recession scenario in economic models, the credit market remains surprisingly resilient, lending has not declined significantly, and consumer demand continues to support investment and industry.