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# 									2024 Wall Street Series: The Conference Board							

FPC Briefing

Dana M. Peterson, Chief Economist and Leader of the Economy, Strategy & Finance Center, the Conference Board

Erik Lundh, Principal Economist, The Conference Board

Markus Schomer, Senior Global Economist, The Conference Board

Thursday, February 8, 2:00 p.m. ET

New York City

February 8, 2024

## 								Summary							

        -  Economists from The Conference Board shared their insights on the state and trajectory of the global economy.  As part of their economic forecast, they covered the 2024 economic outlook including what is next for the U.S. economy, Europe’s economic health, long-term growth drivers, the state of China’s economy, and, geopolitical factors. 

**NEW YORK FOREIGN PRESS CENTER, 799 UNITED NATIONS PLAZA, 10TH FLOOR**

**MODERATOR:**  Happy Friday.  Good afternoon, everyone, and welcome.  It’s a pleasure to welcome you here to the New York Foreign Press Center, and especially to welcome our briefers today.  It’s a pleasure to introduce the Conference Board.  We have Dana Peterson in the center, the chief economist and leader of the Economy, Strategy & Finance Center.  We have Erik Lundh, principal economist — 

**STAFF:**  Daphne. 

**MODERATOR:**  And – excuse me; I’m sorry – and Markus Schomer, chief global economist.  Today’s briefing is kicking off our annual Wall Street Series, which provides you with exclusive access to experts on the U.S. and global economies.  Ms. Peterson and her team will share insights on the state and trajectory of the global economy.  As part of their economic forecast, they’re going to cover the 2024 economic outlook, what’s next for the U.S. economy, Europe’s economic health, long-term growth drivers, the state of China’s economy, and touch on geopolitical factors.  

My name is Daphne Stavropoulos and I’ll be today’s moderator in the Q&A portion.  Today’s presentation, I will be on slides and I’ll share them with you afterwards.  And today’s presentation is on the record.

And with that, it’s a pleasure to turn it over to Ms. Peterson.  Welcome, and thank you. 

**MS PETERSON:**  Thank you so much.  Hi, everybody.  Good afternoon, and we’re honored to be here.  I’m Dana Peterson, global chief economist at the Conference Board.  I’m here with my principal economist for the U.S. and senior economist for global.  So we’re just going to give a presentation – 15, 20 minutes – and then we’re going to open it up for questions from all of you.  So we’re not going to cover everything in this 20 minutes or so, but we hope to be able to answer all of your questions.

Okay, let’s go to the first slide, please.  Okay, the next one.  (Laughter.)  Awesome.

So these are the big themes and megatrends we see for the global economy.  So there’s still lingering concerns about recessions, inflation – but the good news is inflation is slowing as opposed to rising.  We have wars around the globe that are impacting commodity prices and trade and potentially GDP growth.  And there’s a lot of uncertainty.  

But the good news is that we don’t anticipate that we will have another global recession.  Will global growth be slower this year relative to last year?  Yes.  Will some economies experience recession, maybe like Argentina or UK or Germany?  Possibly.  But we still think the global economy is going to grow at a moderate pace this year and pick up next year. 

So looking at regions in the U.S., which Erik will expound upon, we’re looking at flat growth towards the middle of this year, especially given the fact that we don’t think consumers can maintain the rate of consumption or spending that they engaged in, especially in the second half of last year.  And we do think that the Fed will look to cut interest rates, but probably later on in the year, maybe around the middle of the year as opposed to in March, which is something markets were looking forward to. 

In Europe, we’re looking at still-elevated inflation but very weak growth, and certainly you could have some of the larger economies dip back into recession.  But then we see somewhat better growth next year.  But all in all, the key is going to have to be inflation coming down from current heights.

In China, we expect a slowdown but not a crash.  Indeed, China is experiencing major challenges regarding consumer confidence being very low, a lot of savings among consumers, and that’s certainly weighing on consumption.  And you still have the ongoing residential real estate crisis that’s also impacting provincial governments.  So all of these things domestically suggest there’ll be weak growth, as well as the fact that external demand – which China is very dependent upon for exports – is not going to be that strong this year.  Nonetheless, we do think that China is still going to grow and that its contribution to global growth going forward will still be quite sizable.  

Now, with inflation, like I said, globally inflation is slowing after peaking about a year and a half ago, but it’s still above many of the targets that central banks desire.  So we’re going to have to continue to see progress.  So to that end, you’re going to see a mix of when central banks will begin cutting rates.  Markus will tell you that some emerging markets already have, while some advanced economies are probably going to be later. 

Now, regarding labor markets, in North America – meaning Canada, U.S. – all of Europe, parts of Asia – including Australia, Japan, and even China, South Korea – are experiencing severe issues with labor.  Aging populations means that you have fewer and fewer workers available, and so you have these labor shortages, and so that’s also causing upward pressure on wages in some economies.  And so we’re probably going to continue to see tight labor markets without material reforms in each of these economies to allow for more workers, or companies adopting technology like AI and automation to supplement the work that a human being might do.

So with that, we think that interest rates in the short run, especially for advanced economies, are probably going to remain the way they are until around springtime or the middle of this year.  Some emerging markets are already lowering interest rates.  But it’s our view that, at least for the U.S., we’re probably not going to see interest rates go back to where they were before the pandemic, and that may be true for several other economies just given the lingering pressures from certainly labor shortages, commodity prices, and ongoing disruptions – geopolitical disruptions.  

So that’s the overview.  Now I’m just going to show you a few pictures before I hand it off to Erik.  Next slide, please.

So this is a picture of overall consumer price inflation for the global economy, advanced economies, and also emerging markets.  And you can see that we were making some good progress, and then emerging markets kind of saw a pickup in inflation.  And it doesn’t seem like it’s from energy; it could possibly be from food.  But certainly advanced economies overall, inflation has been coming off because energy prices have been falling, and we’ve also seen the resolution of a lot of supply chain disruptions. 

So the next slide shows prices without food and energy.  And you can see that both for emerging markets and advanced economies, inflation is slowing.  It’s not back to where it should be, where central banks would like it to be, or even close to where we were before the pandemic, but we are making progress.  And we expect to continue to see that progress over the course of this year. 

Next slide, please. 

So this is what I was talking about in terms of central banks.  So here we just aggregated several mature economies and emerging markets.  So in emerging markets, you can see that back in 2020 they cut rates more, and they also raised rates more in 2022 and over 2023, and now they’re starting to cut interest rates to reduce the degree of restrictiveness in monetary policy.  

Meanwhile, advanced economies were a little bit later to the game: they didn’t cut as much, they didn’t raise as much, and right now you can see it’s kind of flattening out where they’re in a pause mode.  But again, we do expect interest rate cuts to begin probably in Europe early spring, U.S. probably in the middle of this year.

Next slide, please. 

Ooh, this is a little tough to see, but the point of this slide is that on the left-hand side you have all the advanced and mature economies, and on the right-hand side you have all the emerging markets.  And the key thing is that this year and next year, advanced economies are not going to be growing very fast.  Meanwhile, emerging markets are going to be growing not as rapidly as they had been, but certainly faster than advanced economies.  And it’s really going to be these emerging markets that are going to be driving the greater contributions to growth this year, especially China and India.  

And if we go to the next slide, this is a different way of looking at this, where these are contributions to the global growth rate for the year.  So in 2022 – 2024, we expect 2.8 percent global GDP growth with a big chunk of that coming from China, India, and other Asian economies.  And it’s the same story in 2025.  Meanwhile, you can see advanced economies not really contributing much, but at least the U.S. is trying to do its part.  

Next slide.  

So this is my final slide, and this is basically our long-run outlook for global GDP growth.  So this is looking out over the next five years and then the five years after that, so the next 10 years.  And you can see that this pattern of advanced economies kind of falling behind the growth rates of emerging markets persists.  And it’s the case that, yes, China, even though it’s not going to experience the rate of growth that we saw in the past – indeed China grew 5.2 percentage points last year; we’re looking at 4.1 percent this year and then 3.9 percent next year – the contribution to growth is still going to outweigh the contributions from, say, the U.S. or Europe.  And then you can see a giant chunk from India and then the rest of emerging markets, many of those near advanced economies.  

So that’s really in a nutshell what we think about the global economy and these large regions this year and then heading into next year.  

Next slide, please.  And over to Erik.

**MR LUNDH:**Thanks, Dana, and thanks, everybody, for your time and coming.  So I’m just going to give a brief overview of what’s been happening in the U.S. economy and what our expectations are for 2024.  

Next slide, please.

So this is just one example of some of the really positive growth trends we’ve been seeing toward the tail end of last year and at the beginning of 2024.  What we’re looking at here is the Conference Board’s gauge of U.S. consumer confidence.  You can see the solid black line is the overall confidence index with the two components also shown as well, the future expectations and the present situation.  All of these reports have been going up for a couple of months now, and we saw some really strong GDP growth numbers at the end of last year as well.  

Moving into the beginning of 2024, we do have some good data that we’ve been seeing.  We have both the manufacturing and services PMI numbers, which have been jumping as of January.  We just this morning released our quarterly gauge of CEO confidence, which also rose to a two-year high as well.  So really, we’re transitioning out of 2023 and into 2024 with a lot more strength, I think, than a lot of people had thought would be the case.  

And so our expectation is that we’re going to see growth continue into the first quarter.  But as Dana mentioned earlier on, the momentum is going to cool significantly, we think, towards the middle of the year for a number of reasons.  

Let’s go to the next slide, please.  

So one of the other sort of positive trends that we saw over the course of last year is a tremendous deceleration in terms of the kinds of inflation that were being reported here in the U.S.  We’ve had six really promising months of inflation data.  There’s a lot of reason to believe that that is going to continue into the first and the second quarter of this year, especially as some of the dwelling price numbers work their way into the CPI and the PCE price indexes.  We have been seeing those rents come – rent inflation has come down quite a bit, but it takes a while for it to show up in the inflation data.

So our expectation is that we’re going to continue to see inflation fall and that we may see the Fed’s 2 percent target be achieved by sometime this summer – we think potentially the end of Q2 or the beginning of Q3.  Thereafter, we expect inflation to stabilize and the Fed basically to be able to walk a tightrope in terms of really sort of achieving the goal of bringing the price increases under control.  

Next slide, please.

One of the sort of byproducts of the inflation progress, as Dana mentioned earlier on, is that we do expect the Fed to cut interest rates starting in June.  As has been discussed at the last FOMC meeting, Chair Powell said that it’s very unlikely in March; they’re waiting for additional progress on the inflation numbers.  We think it will eventually come in at around June.  

Thereafter, we think – and again, I haven’t gotten quite to the unemployment numbers yet – but the rate at which we expect the cuts to occur is about 25 basis points per meeting consecutively, back to back, moving forward.  We think as the economy slows, as inflation continues to come down and collapse towards a 2 percent target, once the Fed starts to make the cuts, it’s going to be difficult for it to stop until it gets closer to the terminal rate.  And we expect that neutral terminal rate to be higher than what it was before the pandemic.  Something along the lines of 2.62, 2.7 percent, we think, is where the Fed’s ultimately going to wind up.

On the unemployment numbers, as a function of the slowdown in consumer spending of the high interest rates, we think that the labor market will cool.  We’re expecting unemployment numbers to rise to 4 to 4.2 percent potentially later this year.  When you look at this chart that looks a little bit dramatic – but if you put this into context in terms of what we were seeing in 2019 and 2018, these are very sustainable numbers.  They’re not numbers that are alarmist.  We’re not expecting the labor market to fall apart, but we are expecting it to cool over the course of this year to a certain extent.  

Next slide.

So finally, in terms of our top-line GDP growth, we do not believe that the U.S. is going to slide into a recession in 2024, but we do think there will be a lull in growth.  So we’re looking at something along the lines of maybe 0 to 1 percent growth in Q2 and Q3.  That’s a lot – largely driven by the U.S. consumer.  I’m sure all of you have seen reports recently about the size of consumer debt.  It’s been ramping up quite a bit.  Credit card debt’s at just over $1.1 trillion.  The interest rates that consumers pay on credit cards is a lot higher as well than it used to be because Fed policy is as tight as it is.  And so we think this is going to have a cooling effect in terms of their ability to spend, their ability to balance their debt payments, their spending activity; very low savings that the consumers have engaged in over the last two years or so.  

So there’s going to be a bit of a reset, is our expectation.  Thereafter, we think that as interest rates continue to come down, inflation continues to cool, consumers find their footing, we’re going to see growth trend a little bit more towards its quarterly annualized average of about 2 percent or so in 2025.  

So that’s just a quick overview of our expectations for the U.S., and my colleague Markus is going to talk about emerging markets a bit.  

**MR SCHOMER:**Yes.  Can you move on to the next slide?  

Yeah, so I’m talking – after that deep dive into the U.S., I’m touching just a little bit on emerging markets, much larger parts of the world, so less time to be spent on individual stories, but that’s maybe something we can do in the Q&A session.  

So we divide emerging markets into five geographic categories at the Conference Board, and I’ll just to show you our forecast for GDP growth this year and next year on this slide.  You can see that the green line that’s developing Asia, including China and India, are – is still the fastest-growing geography among the emerging markets.  And that’s despite the fact that the growth in China is slowing down quite significantly.  Dana already mentioned, after 5 percent growth last year, we’re going to shift down to only 4 percent growth this year, maintain that probably in 2025.  But that’s a significant change.

But you can see it’s not that much of a downshift in the green line because other countries are picking up the slack here – India, for example, but also other parts of developing Asia.  The lines are all a little bit difficult to read, but the other two things maybe worth highlighting is you can see the blue line – that’s Latin America, a region that is going through a much more traditional business cycle.  We had a run-up in inflation as a result of strong growth, which prompted central banks to raise interest rates, which slowed growth.  We can see that in this blue line.  Then central bank starting cutting rates, and we’re expecting that to show up in the growth numbers by the end of this year, in particular next year, and growth will pick up again just in a very normal business cycle.  

The other lines, not really showing much cyclicality.  The Russia-Central Asia line is very much driven by Russia and the impact of sanctions and the war with Ukraine.

But maybe the other line I wanted to highlight is the red line – that’s Middle East and North Africa, mostly the Gulf states.  And here you can see not so much the impact of the cyclical parts of the rebound after the pandemic, but the impact of cuts in oil production.  That slowed growth significantly last year.  But we expect no additional cuts in production – actually, production probably picking up again slightly this year.  And that will drive the rebounding growth we’re seeing in that red line in the Middle East and North Africa.  

Can we go to the next slide, please?  

If you just look at what’s happening right now, sort of a very coincident look at emerging markets, I always like to look at purchasing managers’ indices – they’re published very much a few days after the end of the month, so it’s always the first look at what’s going on in terms of the underlying growth conditions, and we’ve seen quite a couple of signs of improvements here.  

On the left side – that’s the manufacturing side of the story – you can see especially the red line – that’s Brazil – showed a big jump in the latest January numbers, maybe indicating that our growth numbers are probably a little bit too low.  We had a pickup in Latin America towards the end of the year, but it may actually be happening earlier.  And if you look at the sort of dark, almost black-looking line, that’s India.  You can see how India has really been leading at least this group of emerging markets both on the industrial – i.e. manufacturing – side, but also in terms of services not showing much of a slowdown at all.

If you go on to the next slide, please.  

Dana already mentioned that some emerging markets are cutting rates, and it’s quite interesting.  In the developed world, when we talk about the U.S. and Europe, the UK, it’s all about sort of when will central banks start cutting interest rates.  But in the emerging markets, we already have sort of two different camps.  On the one side, on the right part of my slide, there are a number of central banks that already started to cut rates.  Some of them are the typical central banks who always go early in a global rate-cutting cycle, like Brazil, but also Chile.  Chile is the central bank that has cut rates the most among all the major emerging market central banks.

But it’s not just a Latin American story, although I guess it’s mainly a Latin American story, because everybody is cutting interest rates.  Peru is cutting rates.  Colombia is cutting rates.  But we’re seeing central banks in other parts of the world also already starting.  Poland and Hungary, for example, in Eastern Europe, and Vietnam sort of as a representative of Asia.  So the rate-cutting cycle in the emerging markets is already spreading beyond the traditional starting point, which is classically in Latin America, but it’s impacting other geographies in the emerging markets as well.

But then you still have a number of banks that are either sort of on hold for an extended period – in some ways look more like the major developed world central banks – or still raising rates.  That’s the left-hand – the chart on the left-hand side of my slide.  And you can see Mexico, the yellow line, is one of those not behaving like the Latin American central bank and maybe providing sort of another hint that Mexico nowadays is much more like the U.S.  It’s so incorporated into the U.S. business cycle now that it behaves even in monetary policy more like the U.S. and not anymore like other major Latin American economies.  I suspect Mexico will wait for the Federal Reserve to cut rates and then will follow the Federal Reserve downwards.

You can also see India is on that – in that chart.  Growth has been very strong and inflation is not slowing as much as it is in other parts of the emerging markets, which is preventing the Reserve Bank of India to start cutting interest rates.  And then if you can see it, if you look closely, Indonesia is one of the central banks that most recently even had to raise rates because inflation is not coming down as much as it is in other parts of the emerging markets.  So very much a story of two camps.

If we can go to the next slide, please.  

Just a few comments on China, because it’s the biggest piece of emerging markets and, as Dana highlighted, also the biggest contributor to overall global GDP growth.  We know about some of the growth challenges from the property crisis.  The negative stories about the economy are in the news every day.  But one way to look at what’s going on in China is to look at the inflation side of the story.  I could have shown you PMI numbers or retail sales or industrial production numbers, but I think the inflation story tells it quite well.  

The red line is producer price inflation, so inflation among the companies in the industrial sector, the companies sector, and that has been negative, falling – so it’s in deflation – for a while now.  It very much looks like the situation we were in in the early 2010s, when producer prices were falling and China was a main exporter of deflation.  And I think we’re back in the same kind of situation where China is helping the rest of the world slow down their inflation rates through – especially through the good side.

But what’s different this time is the blue line.  In the 2010s, we still had normal, reasonable inflation on the consumer side because the consumer was quite healthy.  But now consumer price inflation is also negative, so we have the situation of insufficient demand on the consumer side and excess supply on the producer side, and I think that highlights sort of the double-sided problem that China is facing right now.

If you go to the next slide, please.  

So the question is what is China doing about it, and I think it’s a very different situation compared to that situation in the 2010s.  Then, China relied very much on monetary policy, and I think we’re – many of us have been looking at these – at credit impulse charts or total social financing, however you want to look at this.  This is a chart that looks at total social financing as a ratio over GDP and then the change in that ratio, but it doesn’t really matter how you look at it.  You can also look at it outright.

The point is China had gone through these waves of monetary stimulus – not through interest rates but through the supply of credit into the economy – and then had withdrawn that stimulus, and they had to bring it back again.  We can see the remnants here in this chart of the financial crisis at the – on the very left-hand side of the chart.  And then it – China engaged in the same kind of stimulus again before the pandemic and then after the pandemic or during the pandemic.  

But every time China did this, the effectiveness of that tool became less and less and less, and now we’ve seen very little in terms of a credit stimulus.  Maybe the line is starting in the right direction, but it’s nowhere near where it was in these previous waves, and that’s partly because it’s not really a question of credit supply or even the cost of credit, but there’s just no demand for credit.  So this is not really the right strategy tool anymore, and China will be more reliant this time on fiscal policy.

If you go to the last slide.  The last slide looks at sort of the longer-term outlook for emerging markets.  This is the result of a long-term forecasting model we run at the Conference Board on an annual basis.  It’s sort of a – it’s a supply-side model, so it doesn’t look at consumption and investment and exports, but it looks at the inputs into the supply side.  If you think about it, a classic production function, for those of us who’ve done some economics, it looks at the supply of labor or the impact of – contribution of labor, the contribution of capital, and total factor productivity.  

And we can see the result of this is sort of the small red number, which I probably should make it a bit bigger.  That’s the estimate for the underlying growth rate, and that is expected to come down significantly from 6.7 percent in the 10 years before the pandemic to something just above 3 percent over the next 10 years.  So that’s our longer-term outlook for the underlying growth rate in the emerging markets.

And I’ll leave it there.  Dana, if you want to have some final remarks, otherwise we can do some Q&A.

**MS PETERSON:**  That’s great.  Thank you, Markus and Erik.  We can open things up for Q&A.

**MODERATOR:**  (Off-mike.)

**MS PETERSON:**  (Laughter.)  Awesome.  I think his hand was up first.  Yes.

**QUESTION:**  Hello, yes.  Arnaud Leparmentier for the daily Le Monde.  What are the risks that you are looking – so black swans that may happen, because you haven’t talked about this?  It seems to be shiny weather, so what are the risks?

**MS PETERSON:**  Absolutely.  I usually have a slide of risks, but I was trying not to depress everybody.  But yes, let’s talk about them.  I see both downside and upside risks, so – to the global economy, and then Erik and Markus can talk about more regional risk.

So one big risk is the pace of inflation slowing.  So yes, we are seeing inflation slowing because supply chain disruptions have been more or less resolved, and we’re also seeing housing prices in a number of economies in Europe and especially in the U.S. coming off, and that’s being reflected in the inflation.  And certainly for Europe in particular, energy prices have come off because of two reasons.  The Europeans have been able to source liquid natural gas from the U.S. and parts of the MENA region, and they’re also diversifying away from fossil fuels given the fact that they can no longer really rely on Russia.  So those things have helped bring down inflation, but I would say there are probably like four or five factors that are going to continue to put upward pressure on inflation, and some of these are structural changes in the global economy.  

One is persistency of labor shortages.  Now, this is a problem for just about every advanced/mature economy, as well as some very large emerging markets like China and Russia, and that’s because Baby Boomers are everywhere all over the world.  They’re getting older.  They’re leaving the labor market.  But you have more Baby Boomers in some countries than others, and certainly with advanced economies plus China you’ve had very low birth rates.  So put those two things together and you don’t have enough workers.  And so labor shortages are here with us right now and we don’t think that they’re going to go away without major policy changes to add more workers and also innovations by businesses and government to create technologies that can make up for the fact that you may not be able to find more workers.

And so that’s all to say that you’re going to continue to see upward pressure on wages.  We’re seeing it in Europe.  We’re seeing it in the U.S.  And that’s going to resist what central banks are trying to do to lower inflation back to targets and keep it there sustainably.  

Another factor is the global energy transition.  So we don’t think this will happen overnight, it’s going to happen probably over the course of decades in fits and starts, but nonetheless there are huge transition costs.  You must build out infrastructure to allow the facilitation of renewable energy use.  You also need to retrofit buildings.  You need to get rid of old equipment, buy new equipment that can accommodate renewables.

And the thing is that companies are going to have to invest in these areas, and so are consumers.  And you do have some incentives from governments to move in this direction, but it’s still going to cost money.  

Another thing is deglobalization.  So what do I mean by that?  The fact that you’ve seen even before the pandemic a rise in protectionism among a number of economies and also the massive supply chain disruptions during the pandemic made a number of governments and companies realize that they’re very vulnerable in the way of having globalized supply chains.

So in response, companies are either voluntarily reorienting their supply chains and reshoring, or they’re feeling the pressure from governments to do so.  And certainly when you look at the United States, there’s been a massive degree of reshoring.

How do we know this?  Well, we can see this in the hard data.  If you look at manufacturing, construction, the biggest driver is for any construction having to do with infrastructure, so that’s from the infrastructure bill, and factories.  And the factories are accommodating a lot of the products that the administration has focused on in its industrial policies, like products around defense, technology, health care.  And so you’re seeing these factories go up.

Meanwhile, you’re seeing in the employment data a surge in employment in nonresidential construction to accommodate infrastructure and also the factory building.  We’re also seeing manufacturing jobs – strong demand in those areas for people to work in those factories.  But we’re also noticing wages rising both for nonresidential construction and factories because there aren’t enough people, going back to the labor shortage issue.

So deglobalization is expensive and it’s going to be passed on to the customer.

And I’m going to just leave those three things in terms of upward pressures on inflation.  We’re very concerned about geopolitical risks.  So you have these ongoing wars.  You have conflict in something like four out of seven continents.  So the war in Ukraine is still highly disruptive, especially for food prices in terms of commodities, but it’s also very potentially destabilizing – destabilizing for the region, where many economies that border Russia are nervous that they’re next, right?  And that can certainly prompt frictions in Western Europe in terms of economies that want to be engaged or don’t, really gray swan risk that the European Union breaks up and you lose the economic and the monetary union – I’m sorry, the Euro area.  Well, the European Union, but mainly the Euro area breaks up and you lose the benefits of the shared economy and currency and monetary policy regime.

And then you have the ongoing war between Israel and Hamas.  So initially when it happened, horrific things happened and are continuing to occur every day.  It’s a horrific humanitarian major crisis.  But in terms of reaction from markets, there was none because you didn’t really have any commodities that were being impacted.  But now – but then you started seeing activities in the Red Sea.  So in response to the goings-on in Gaza, you have organizations that are affiliated with Iran attacking ships in the Red Sea.  And so you’re having major disruptions in Red Sea traffic, and roughly 13 percent of all global trade flows through the Red Sea.

And the thing is that for the most part Chinese vessels are not being impacted, but all different other types of vessels, especially those U.S.-flagged vessels or European, but also India and other economies, and even a Russian vessel was attacked.  So this is not only a major disruption in supply chains and trade but also geopolitically it’s kind of a tinderbox.  And so those are ongoing risks.

And then there’s also the ongoing tensions between the U.S. and China.  Now, they’ve calmed in the last few months, which is good, and China is looking to make some concessions to be more open.  But the thing is that the two economies still view each other as strategic competitors along a number of fronts – trade, investments in infrastructure and high-tech, the race for control over renewable resources and technology, soft power in terms of influence especially in the Global South, and hard power especially with respect to who has dominance over the South China Sea.  

So all of these things create angst among businesses and governments and average human beings in terms of the implications of these things becoming broader conflicts or military conflicts, and also the implications for supply chains, GDP growth, and inflation.

So that’s all the bad stuff, right?  And then you can toss in the fact that there are roughly 70 elections going on globally, and half the – half of the global population will be voting.  And certainly a lot of eyes are on the U.S. election uncertainty, especially whoever wins, what are the policies going to look like?  Are we going to see more trade wars or fewer, more tariffs or fewer, and all those things.

Now, on the positive side, because I want to leave everything on a happy note at least, we see tremendous upside – upside risks, and one thing is certainly if we do have peaceful resolutions to these conflicts.  Certainly the war between Israel and Hamas there is potential that if there’s a ceasefire, maybe that’s a shot for – he’s shaking his head no – for negotiations.

But the things is that, like, I don’t know how these things are going to resolve.  But if they did, it would be tremendous to stop the human suffering around the world, but also there’s going to be impetus and money used to redevelop and rebuild, and also to stop the disruptions in the global supply chains that lead to inflation.

In terms of productivity, I didn’t include this chart, but we anticipate that going forward productivity is going to be very important – a very important input to global growth, if you think about what Markus mentioned, your capital inputs, your labor inputs, and your what we call total factor productivity.  We’ll just call it productivity, right?

And the thing is that the contribution from labor is going to shrink because you have the Baby Boomers leaving the labor market everywhere, some faster than others.  There’s still going to be capital deepening, but productivity is going to be very important.  And where can we find sources of productivity?  Well, things that we’re doing now and things that are going to come in the future will help bolster productivity.

So what’s happening now?  Many governments, including the U.S., China, Europe, are investing in infrastructure, right?  The U.S. is kind of – actually kind of behind the curve in terms of investing in infrastructure, but we’re getting there.  Other economies are ahead of the U.S.  And infrastructure is important because it helps lower the cost of doing business, lowers the cost of travel for consumers, right?  If you have roads and bridges and tunnels and trains and planes and all those things and ports that work, then you don’t have to spend as much time or money fixing things that break because of poor infrastructure.

There’s also a lot of focus on R&D and investing in elevated forms of technology.  So for example, China has definitely moved up the value chain in terms of the type of products it produces and the technological nature of it.  Intellectual property for things like AI and 5G and those kinds of things are in the U.S., and then they’re manufactured in Taiwan, let’s say.  So all these things are going to be GDP-enhancing.  And these are investments that are happening right now.

So ongoing investments include constant upskilling and reskilling of your labor force.  And that’s going to be necessary because what’s upon us?  AI, right?  So you’re going to need people who can understand how to use a technology to make them more productive, which generates this productivity.  And then we have technologies that are in their nascent stage that are going to become more accessible, like 3D printing, 5G, quantum computing.  But then we’re also going to have new inventions, like the use of hydrogen as a meaningful venue, avenue for distributing energy, or fusion.  

So all these things can generate lots more productivity over the next – right now and over the next 10 years.  So we’re really optimistic about that.

And then one final thing I’m going to say is that you’re still going to have growth in the global middle class, and that’s important, because as people become wealthier they consume more and you can – they can rely less on elevated growth rates, because they’re focused more on consumption, right.  And you can – if you see that happening, it means that people are better off, fewer people starving, going hungry, going thirsty, engaging in wars over resources.  

And certainly we think India is going to be kind of the – one of the leaders in growth in the global middle class over the next decade.  India has a much younger population, say relative to the U.S. or China.  India also has a very educated young population, and India’s also very situated in terms of having strong investments in technology and in services delivery, and also in some cases is an alternative to production relative to China.  

So there are a lot of good things to think about here, but certainly lots of things to worry about.  That was a very long answer to your question, but hopefully it answered a bunch of questions. 

**QUESTION:**  Thank you.  Aline Bronzati from Agencia Estadao, Brazil, Brazilian newswire.  Just a follow-up about elections.  How do you see the elections around the world impacting the fiscal and monetary policies in developed and emerging markets, and especial Latin America and Brazil, please.  Thank you.  

**MS PETERSON:**  Sure.  I’ll start, and then pass the baton on to Markus.  So in terms of monetary policy in the U.S., elections don’t impact monetary policy.  The Fed is fully independent, and Chair Powell reiterated that the other week.  

But in terms of fiscal policies, many central – many governments have accumulated a lot of debt.  Some of that began during the Great Recession 15 years ago and then some economies engaged in austerity, like Europe, and they had a very weak period.  But then other economies just kind of piled on once the pandemic came, and so there’s a lot of sovereign debt out there.  And most economies – if you look at the IMF’s forecast over the next five years or so, most economies are not going to be dialing down debt to sustainable levels.  

And so all debt is not bad debt.  So some of the debt can be generated by GDP-enhancing activities, like investing in infrastructure.  That’s good; that generates growth, so it’s kind of worth the costs, and you can help bring down the costs once you get that growth.  But for many economies, especially advanced economies, there’s going to be a lot of spending on the Baby Boomer generation, right, so health care, income.  And that’s just going to become more intense over the next decade or so, as you have more and more Baby Boomers leaving the working age group into retirement.  So that – certainly in the U.S., that’s going to be a flashpoint. 

I think people are really focused on it because of three things that happened last year.  So first, you had in the spring where we nearly defaulted on our debt.  And then you had – this is more a financial market thing, but in the fall there were questions around how much debt Treasury could actually issue, such that the market could absorb it.  And then you had something everybody noticed, which was net interest rising dramatically because the Fed raised interest rates very quickly and by a lot.  So people are focused on that.

But the thing is that no one likes austerity for themselves.  Like everyone else should – their programs should be cut and they should pay the price, but not me.  So I think those things are going to be real flashpoints, and certainly that’s been a part of the discussions this year in the U.S. about funding the government and even paying for foreign investments like in Ukraine and Russia, because there’s concern about uncontrollable debt, but yet no one wants to do anything about it. 

So let’s say former President Donald Trump wins.  He’s already indicated that he would allow tax cuts that were implemented in 2017 for individuals to be renewed.  They’re supposed to expire in 2026.  So he said they’d be renewed.  So that’s significant.  It’s not clear what the current administration would do about that, if they continue, but that’s certainly something that’s relevant for the U.S.

In terms of policy, thinking about the U.S., the Executive Branch has a lot of power over trade, war powers, and regulation, and also things like border security.  So those are big flashpoints in the U.S. and are really going to matter for the election.  But not only for the U.S. but for the rest of the world.  Will we see more tariffs, or not?  Will we see tighter border security, less immigration, or not?  Are we going to continue to see intensification of a chilly relationship with China?  

So those are all things, and it’s not really clear who’s going to do what.  Because the current administration hasn’t put out a platform – this is what we’re going to 2024 and beyond.  But certainly we have heard some things from former President Trump.  

Oh, and I’m sorry, Markus.  Latin America.  

**MR SCHOMER:**  Well, the emerging markets in general, it feels like – it’s an interesting point, where we are right now, where I think there are very few – I would argue there are very few sort of challenges right now for either the monetary or the fiscal side.  So on the monetary side, the question is more like how far are you cutting rates and when you start cutting rates, why I showed you that one chart.  It’s not when we’re in the opposite direction where central banks try not to raise rates too much in order to slow down growth, which could create political problems.  That’s a different story.  Then you see a lot of political influence on the central bank.  But we’re on the other side right now.  I think central banks are reasonably comfortable in that situation.

I mean, Brazil – the problem is inflation started to pick up again, so the central bank is still cutting rates, so you can start to see a bit of a conflict coming up there.  At some stage these early rate cutters will have to stop cutting rates by then – and then that’s a big moment, and where are we in terms of interest rates then?  Are they low enough to stimulate growth or not, right?  So – and will they start raising rates again?  So this conflict is coming, but it’s not a conflict right now.

And on the fiscal side, emerging markets didn’t do well.  The developed markets did.  Nobody – I think very few – I don’t think anybody got checks in emerging markets, like we did in the U.S.  So the deficits never rose as much as they did in the U.S. and in Europe.  And of course, we also had a positive impact from all this inflation on debt, debt to GDP, which – both are nominal numbers impacted by inflation.  So the debt-to-GDP ratios in emerging markets have actually not gone up as much as in the developed world.  

So on the fiscal side, I think the challenge and the potential controversies could be more around as everything settles down, inflation slows down, the focus will go not such much on the debt-to-GDP ratios, but on the deficits.  Where is the deficit now that this benefit from high inflation is gone?  Now you’re back at where is the deficit today, and where is it going to.  

So I would say right now I don’t feel there is a lot of conflict or controversy for policy from both monetary or fiscal policymakers.  But as – I think as we go along, maybe in 2025, the deficit issues will come up, because that’s where all sort of – the developed world will have problems.  The deficit in the U.S. is very high.  Debt is one story, but the deficit is what contributes to the debt, right?  The deficit in the U.S. is very high.  

In Europe, everybody has tried to reduce their deficit and get back below that 3 percent threshold that the Europeans like to be under.  So the Europeans are in slightly better – in a slightly better position, but the focus will be on deficit.  So I imagine that will start to become a story for emerging markets, but I think it’s more like a 2025 story.  

**QUESTION:**  Hi, I’m Soo Kim from Dong-a Ilbo, Korea newspaper.  Thank you for my question – taking my question.  I am curious about how serious the commercial real estate problem is, because I mean, do you think what’s happening to New York Community Bancorp is spreading, and the other banks might be in trouble?  And if time allows, can you share about your outlook on Korean economy as well?  Thank you.

**MS PETERSON:**  So I’ll address the CRE, and I’ll let you talk about Korea, South Korea.  So commercial real estate is in a state of crisis in the U.S.  What is causing this?  Well, a big chunk of the issue is office space.  The reason why office space is in trouble is because, post-pandemic, many people are working remotely or hybrid, and so companies need less office space.  Nonetheless, there are loans on these spaces, and many of these loans are coming due, especially this year and next year, and it’s not clear that the ones – the companies that took out the loans from these banks will pay them back.  And certainly we’re already seeing from non-bank entities that issued loans, those loans are being defaulted on.  

But the problem is that most commercial real estate loans have been issued by banks, and many of them are not the largest banks or even the smallest banks, but the large and medium-size banks, so the two set in the middle out of four.  And that’s thousands of banks.  And the issue is – so for example, we’ve been reading in the news one bank – you mentioned the name; I don’t remember – has been making provisions to absorb losses.  So Moody’s cut them to junk, lowered their rating, and – just because they’re trying to make provisions.  It doesn’t mean that they’re going to necessarily get into huge trouble; they’re just trying to protect themselves.  But that looks – but it raises questions.  And you have many, many institutions that will fall into that category.

So what we saw last year in March is that you had roughly three institutions in the U.S. – there was one in Europe, but they had other issues, not necessarily related to CRE.  And there was a giant rescue.  You had several large banks step in, you had the Federal Reserve step in, and the FDIC, and basically rescue those three banks to prevent contagion.  But what if it’s not three?  What if it’s 20, all at the same time, right?  That’s the challenge.

Now, the concern about contagion abroad is that there are European banks with exposure to U.S. commercial real estate.  And some of them have already come under pressure.  So that’s the concern.  Will we have a redux or a repeat of what we saw last year in March?  It’s possible, especially if you have multiple banks that find themselves either writing down huge losses relative to their tier-one capital, or they have to create liquidity buffers that affect their lending for other things.

So yes, I mean, there’s a huge risk out there from commercial real estate, U.S. commercial real estate, and there’s some risk of some contagion abroad.  Markus?

**MR SCHOMER:**  But it’s, of course, nothing compared to the real estate crisis in China.  And I think that is one of the pieces that goes into our outlook for the Asian region.  So I just had – I just looked up our numbers for South Korea, the forecasting, just a modest pick-up, 1.3 percent growth last year, 1.8 this year, and 2 percent next year.  So we’re not forecasting buoyant growth in South Korea.  

The main reason is the growth dip we’re still expecting in the U.S. in the middle of the year, and the fact that China is downshifting quite significantly this year.  So that’s something that will weigh on economies in the region, whether that’s Japan, South Korea.  Taiwan is a different story because it’s more tied to the semiconductor cycle and the demand in that space.  But South Korea – I look at South Korea and Japan sort of closer together as countries exposed to the rest of the world.  And if the global economy goes through a dip towards the middle of this year, then that’s what’s holding back our forecast for Korea.

**QUESTION:**  Hello.  Solveig Godeluck, French daily Les Echos.  You talked a little bit about it, but I would like to know more about the way that you factor in the result of the November election.  I mean, do you have a kind of Trump scenario as opposed to a Biden scenario with your forecasts?  Thank you.

**MS PETERSON:**  I can start, and Erik, you can jump in.

**MR LUNDH:**  Sure.

**MS PETERSON:**  I would say no.  (Laughter.)  We have a base case, but certainly there are risks around that.  So one big risk is certainly former President Trump has mentioned that he may impose larger tariffs on China.  And we saw what happened during 2018 and 2019, what happens when you have retaliatory tariffs.  But the key thing is that if you place a tariff on a foreign good, you pay for it at home.  (Laughter.)  So it can influence inflation.  

And then I also mentioned the not allowing the individual tax cuts to expire.  Now, that – so whereas tariffs would be negative for growth, allowing tax cuts to persist does – it pretty much does nothing, right, because you’re not disrupting growth.  It only has an impact if you let them go away.  Then you have less income and less consumer spending.  

With the current administration, with the Biden administration, we don’t really know if there are going to be any major changes.  And the thing is that, in terms of big pieces of legislation, it wouldn’t be possible unless there’s a mandate, and a mandate is basically the same party is in charge of the Executive Branch and both chambers of – both houses of Congress.  So when the Biden administration had that two years ago, we saw lots of legislation on infrastructure, CHIPS, stimulus checks, the Inflation Reduction Act.  But it’s very hard to do that if you don’t have control over both chambers of Congress as well.

Erik, has more to say?

**MR LUNDH:**  No, I think you summed it up pretty well.  I mean, this far in advance it’s hard to make direct sort of assumptions about what the policies are going to look like.  As we get closer and closer to the elections, as we get a better idea perhaps of who may have the edge in terms of the outcome, we can start to incorporate what they’ve been saying in terms of changes or taxes, et cetera, into that.  But at this far in advance, it’s a little challenging to do that.

**QUESTION:**  Hi.  My name is Tomomi, and I am from JiJi Press, a Japanese media company.  And I would like to ask about mutual rate.  I think you said it’s gone up.  And I think some people say there’s no evidence mutual rates going up.  So I would like to – I would like you to explain why you are thinking that way.  And then also I am wondering if it’s higher in the U.S. and not so much in other country.

**MS PETERSON:**  Sure.  So I’ll start.  And this is my view; Erik, you can disagree.  

**MR LUNDH:**  No. 

**MS PETERSON:**  But I think the mutual rate is higher and will probably remain elevated because of many of the risks that I mentioned earlier to inflation in terms of upward pressures.  So I fully believe the Fed can return inflation back to 2 percent sustainably.  But in order to achieve the sustainable part, that they will have to keep interest rates than what we were used to.  

So over the last 15 years before the pandemic, the nominal interest rate was 1.5 percentage points.  And so real rates – subtract 2 percent – were negative.  So that’s pretty low.  But if you have all these structural changes that are going to place upward pressure on prices, then you’re probably going to have to keep interest rates higher.  So that means whenever they stop, it’s probably going to be above the steady state that we saw in the 15 years between the Great Financial Crisis and the pandemic.  So that’s my view.  

A lot of people disagree with me, and they think that inflation is actually going to undershoot, and that also many of the pressures I’m talking about can be offset.  So for example, one of the things that I also – I didn’t mention, but I’m also focused on is the fact that we have an imbalance between supply and demand for housing, affordable housing in the U.S.  And someone could – and you’re going to have roughly 155 million Gen Z and Millennials turning 40 over the next 20 years.  Why is that important?  It’s because that’s around the time people want to buy a house.  They’ve paid off their loans.  They’ve accumulated some savings.  They have families.  They want a home.  Someone could come back to me and say, well, the Baby Boomers are going to die off.  That’s terrible.  But – or they’re going to move to a multifamily apartment building complex and leave the big house behind for somebody to buy.  But you’d have to have a lot of that happening, and right now – that could be the solution over time but right now we have this problem.  

And so there’s just so many factors that are inflationary.  It’s hard for me to imagine that they’re not going to impact consumer price indexes and that the Fed in particular won’t need to keep rates higher – lower than what they are, but at a higher point both in nominal and real terms to maintain their target.

**MR LUNDH:**Yeah, I mean, I think a lot of these forces are structural and they’re longer-term.  The – we may see the rate come – the Fed, I think, is going to have to flirt with where it eventually lowers rates to, and I think Powell has been pretty clear about that in terms of even internally at the Fed there are expectations that that neutral rate is higher than it used to be.  Energy transition, demographic issues, geopolitics, changing global supply chains – these are all inflationary and it’s going to have an impact in terms of what kind of rate we need to approach to be able to sort of moderate inflation to a sustainable 2 percent.  

**QUESTON**:  (Inaudible) the other countries.  

**MS PETERSON:**  I don’t know.  Do you know?  

**MR SCHOMER:**  Yeah, I mean – I mean, Erik just listed three or four drivers.  Two of them were global, like supply chain and the likes, but demographics are worse in Europe and in Japan.  So if you look at the other developed countries, the neutral rate there will be lower.  In emerging markets, of course, it’s very different.  I don’t think we’ve – we have as good a handle in terms of modeling on neutral rates in emerging markets, but if you apply just the same way of thinking – if the – the drivers of emerging markets – the driver of the neutral rate are global structural and domestic structural, right.  The global structural is the same for everybody in this model, and then the domestical structural is mainly demographics.  And from that perspective, it would be higher than in the U.S. in many of the emerging markets.

**MODERATOR:**Okay.  We have time for one —   

**MS PETERSON:**His hand has been up, like, for a long time. 

**MODERATOR:**Yeah, one or two more questions.

**QUESTION:**I’m Chun-Chieh Yin from Taiwan Central News Agency.  You mentioned – you briefly mentioned about Taiwan’s economy, so my question is:  Do you have detailed assessment on Taiwan’s economy after a lackluster year last year – about 1.4 percent growth?  Yeah.

**MR SCHOMER:**Well, Taiwan is one of these complicated – Taiwan is a math problem more than anything else, because you call it lackluster and, yes, the annual growth rate for last year was 1.3 or 1.4, right, but that included three quarters where growth was above 7 percent, right.  We just had an 8.8 percent annualized fourth quarter growth rate that followed the 7.8 percent in the third quarter, and I think it was 7.4 something in the second quarter.

So the problem with Taiwan right now is just the way we do the annual growth numbers.  Taiwan is actually rebounding very, very strongly right now.  We expect that to slow next year.  So the story – the way I would look at it – if you look at quarter over quarter numbers, it’s much more of a story where there was a recession and at the end – and at the – at the end of 2022, Taiwan fell into a recession because of the cyclicality of chip demand, and then rebounded very strongly during the course of last year.  But the way the annual numbers is calculated, it looks at the average over the previous year’s average, right.  And the big decline in Q4 and Q1 just lowered that average so much that even the strong growth in 2, 3, and 4 couldn’t get the number up enough above 1.4 percent.  

Now the problem is next year, the quarterly numbers will all slow down, but the – but the average annual number will look really, really good.  So we have a four and a half percent number for 2024, but I think that’s confusing.

We don’t think growth in China – growth in Taiwan is accelerating.  If you look at the quarterly numbers, it will actually settle back at a more sustainable rate.  So in some cases, when you have very, very large positive and negative numbers, you have to be a little careful not to rely too much on the annual number.  It just conceals what’s going on under the hood in the quarterly trend and that may be – sometimes you have to look at both.  And our story is not one of a lackluster ’23.  ’24 – ’22 was lackluster; ’23 was a very strong rebound and that rebound will normalize and settle back in ’24.

**MODERATOR:**There’s a question in the back.  

**QUESTION:**Hi, hello.  I am Sangyoon Kim of the (inaudible) Korean economy newspaper Edaily.  So when do you think the Fed will start cutting rates?  And how many points do you think they could cut this year?

**MR LUNDH:**Yeah, so we track the Fed pretty closely.  At last week’s FOMC meeting, Powell gave some indication in terms of what the immediate future looks like.  It does not look like the March cuts are on the table, which we didn’t really expect to be the case anyways.  Given our sort of forecast for inflation, given our forecast for the U.S. consumer, and given some of the things that have come out of the Fed, we’re expecting to see that first cut land in probably June – yeah – June and probably putting their toe in the water at about 25 basis points.  

Thereafter, we’re expecting to see consecutive 25 basis cuts through the end of the year, so that would total to 125 basis points altogether.  And then as I mentioned earlier, we’re expecting that to continue into 2025 as well, gradually bringing the Fed funds rate down to somewhere around maybe 2.7 percent or so.  So we’re looking at potentially 125 basis points this year and 125 basis points next year.

**QUESTION:**Thank you.  You briefly touched on the situation in shipping, particularly in regard to the Red Sea turmoil.  The problem there has impacted many export-oriented economies, particularly China, which is losing a huge chunk of its market in Europe, number one; and it’s also finding it very difficult to ship to the East Coast of the U.S.  The West Coast, of course, goes – everything goes via Pacific, but the East Coast is also impacted.  How do you see the future of this turmoil impacting China’s growth?

**MS PETERSON:**Absolutely.  So some of the things we would say are going to be the exact opposite of what you just said.  So you have to look at which ships are being attacked, and it’s not Chinese ships.  So China is not having any issues passing content through the Red Sea.  It’s – mainly, it’s – it’s everybody else, mainly U.S.- and European-flagged ships or ships that are owned by U.S. and European companies.  But also other emerging markets like India, their ships have been attacked, and India has deployed war vessels in the Indian Ocean to protect its ships.  Also recently, shockingly, a Russian ship was also attacked.  

So in terms of the damage from growth – and we actually did a scenario.  We said what happens if you have a cessation of shipping from either seven days or 60 days – seven or 90 days – who’s the most impacted?  So definitely Europe and also a number of Asian economies apart from China, like India, Vietnam – like, Vietnam has a significant impact.  And the – the impact on the U.S. and even Mexico is tiny.  Why?  Because they have the benefit of two oceans, right?  So – and same thing with Canada.  So it’s not really a big impact for the Western Hemisphere.  

Now, they are having issues with the Panama Canal because there’s not enough water due to droughts.  But in terms of the Red Sea, there’s very little trade that the U.S. and Canada is making through that outlet.  And certainly when you look at the trade that’s being impacted the most, it’s European trade and also MENA, and certainly Egypt is suffering because they generate a lot of revenue from the traffic that goes through the Red Sea.  So we did – in the analysis we did look at, well, let’s say China started being impacted.  Yes, China would suffer, but it’s much greater for several other economies, especially many European countries and Asian economies apart from China.

**MODERATOR:**Well, I think we’re out of time.  I want to thank each of you for coming today.  It was a pleasure to have you here.  Thanks to everyone.  Today’s briefing was on the record.  That concludes this program.  Thank you.

**MS PETERSON:**Thank you. 

**MODERATOR:**And before we end, though, I just wanted to make a few announcements, if I may.  There was a lot of discussion about real estate, and I wanted to let you know that on the 22nd, we’ll be hosting a dean at the Real Estate Institute at NYU to be talking about the real estate market and 2024 outlook.  So that will be here on the 24th.  And the – I’m sorry, February 22nd.  And then February 28th, we’ll be hosting the chief economist Mark Zandi of Moody’s as well for a follow-on briefing in this series.

And I should have said it at the top, and I apologize.  Our briefers’ opinions are their own and don’t reflect the views of the U.S. Government.  So apologize for not saying that up front.  Thank you.

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