A mixed track record

Vivian: Hello, I'm Vivian Estadt, Client Service Director at SEI. I'm here with Chief Market Strategist and Senior Portfolio Manager, Jim Solloway, to provide a preview of some of the timely topics he covers in our most recent economic outlook. Jim, last time we met, investor sentiment was quite enthusiastic over the prospect of a soft economic landing. In the first three months of 2024, how have global economies performed relative to expectations?

Jim: Thanks, Vivian. The global economic outlook still looks quite mixed, but there are scattered signs of modest improvement. The U.S. appears to be chugging along quite nicely, posting solid gains that have mostly surprised to the upside. From the running tabulation of inflation-adjusted GDP, you can see that the U.S. economy isn't exactly a runaway train. Yet, January's acceleration was well above the long-term average growth potential of 2%, even as the numbers weakened somewhat late in the first quarter of this year.

Vivian: Do you think it's safe to say then that a U.S. recession is no longer in the cards for 2024?

Jim: Economic growth in the U.S. will likely decelerate further, but there is little sign that a recession is looming. I do think that the steep rise in interest rates over the past two years will be felt to a greater extent as more households and businesses take out new loans or refinance existing obligations. It's also worth noting that the vast buildup of excess savings that occurred during the COVID-19 emergency has largely been reversed. Consumers will now be dependent on the continued strength of the job market and income gains that exceed inflation. Still, until there is more substantial weakness in employment trends, we think U.S. consumers will remain on track.

Vivian: What are you seeing in international economies? Are the signals as promising?

Jim: Most other major advanced economies continue to struggle, but could pick up some steam in the months ahead. While the strength of the U.S. economy is well documented, Citigroup's Economic Surprise Index for the United States, the United Kingdom, Canada, and the Eurozone reveals that the Eurozone has been showing unexpected strength. This simply illustrates how low the bar has been set for these economies. Canada and the United Kingdom, by contrast, have been posting disappointing economic data as of late, although both countries appear to have enjoyed a weather-related rebound in real GDP during January.

Vivian: You've touched on the major developed economies. What are your thoughts about China? The Chinese government has made efforts to support the economy, lowering interest rates, tax cuts, and measures to bolster the housing market to name a few. It seems these supportive measures have yet to pay off.

Jim: China still remains a big question mark. While there have been signs of improvement, the structural challenges are immense. On the positive side, Chinese Lunar New Year's celebrations boosted consumer activity. China's stock market has also rebounded nicely since late January, but it is recovering from exceedingly low levels. Still, the debt overhang at the local government level and the overbuilding that occurred in years past are now coming back to bite the country. The central government has been reluctant to devise an aggressive bailout of debt burden local governments or deal decisively with the property crisis. While China's problems are not an exact replay of the global financial crisis, there are similarities because it will take time for households, businesses, and local governments to deleverage and repair their balance sheets. Even if the Chinese central government follows this train of thought and becomes more aggressive in its rescue efforts, it could take several more years before the economy achieves a better balance.

Vivian: Global inflation and central bank activity continue to be at the top of everyone's minds, specifically the hopes that central banks will finally begin to lower interest rates.

Jim: While inflation has abated somewhat, inflationary pressures remain, which will present a major challenge from monetary policy makers. I discuss these and more in part two of my economic review and outlook.

Vivian: Thanks, Jim. We look forward to your insights in part two. SEI is focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process as the impact varies based on each client's goals. For more of SEI's insights, read our latest economic outlook available on our website.