Examining the 2024 global economic outlook and its implications for commercial real estate

El-Erian pointed out that when it comes to drastic fiscal policy changes, markets have a tipping point: “The lesson other countries should take away is that you don’t want to get too close to the cliff.”

The war in Gaza continues to take a devastating humanitarian toll on the people in the region; however, the conflict has not escalated to the point of inflicting severe hardship on the global economy. Specifically, the war has not caused a material increase in oil prices, a result that economists warn could still occur, especially if the conflict spreads to other parts of the Middle East. However, the war has disrupted global shipping routes, with container ships taking a longer route around Africa to avoid confrontations in the Red Sea and Suez Canal. These longer routes contribute to extended shipping times and cost-push inflation, primarily in Europe.

The EU is facing other economic challenges as well. While Europe managed the energy crisis caused by the war in Ukraine more successfully than forecasters expected, El-Erian said the continent will be lucky to achieve 0% growth in 2024. This is due to a number of factors, including cost-push inflation and Germany's debt brake policy, which limits the public deficit to 0.35% of gross domestic product. Additionally, El-Erian pointed out that compared to the U.S., the countries that make up the EU are slower to legislate collectively in support of the economic growth engines of tomorrow, like artificial intelligence and clean energy.

Meanwhile, the U.K. is still feeling the negative economic effects of exiting the EU amid other economic headwinds. Brexit, said El-Erian, dismantled the U.K.’s main trading relationships without replacing those avenues of revenue generation. In the end, while the political message of Brexit resonated with many voters, that message overshadowed the practical economic consequences of the move. The U.K. financial markets are also still recovering from the shock of Prime Minister Liz Truss’s failed budget plan and swift resignation in late 2022. El-Erian pointed out that when it comes to drastic fiscal policy changes, markets have a tipping point: “The lesson other countries should take away is that you don’t want to get too close to the cliff.”
 

China’s big slowdown, yield curve control in Japan, and an upside surprise in emerging markets

From a global perspective, China’s slowdown represents the loss of one major growth driver for the global economy — however, the loss is not disastrous because the U.S. remains the strongest engine of global economic growth.

China’s recent economic slowdown has implications beyond its own borders. El-Erian explained that China faces two distinct problems: First, the country can no longer rely on the global economy to serve as a tailwind for its economic growth; and second, China has pockets of excessive debt, including leveraged real estate, and needs to find ways to deflate that debt without contaminating the rest of its economy.

From a global perspective, China’s slowdown represents the loss of one major growth driver for the global economy — however, the loss is not disastrous because the U.S. remains the strongest engine of global economic growth. In addition, China is experiencing — and exporting — deflation that helps lower prices, said El-Erian. While lower prices can be a positive, too much deflation for too long can create what he called a vicious cycle, where consumers delay consumption because they think prices will be lower in the future. These delays result in a drop in demand, and the more demand comes down, the worse deflation ends up being.

Japan’s approach to managing inflation also has economic implications for the rest of the world. “Japan used one of the most blunt instruments: It capped its 10-year yield,” said El-Erian. The Japanese government has since pulled back on yield curve control, and rates will return to positive this year, but El-Erian estimated a 70% chance of this happening in an orderly fashion. And because Japanese pension funds and insurance companies are large holders of foreign bonds, if the country’s economic challenges result in sales of those bonds, it could affect the global economy.

Addressing unexpected moves within the global response to inflation, El-Erian pointed to emerging markets. When inflation spikes and the U.S. dollar appreciates rapidly, concerns often arise about the implications for emerging markets. “Brazil didn’t wait for the Fed to increase rates aggressively, they moved first. Mexico, same thing. So they avoided the capital outflows, and the sorts of tendencies that tip them over,” said El-Erian. While the picture is not all rosy, especially in places like Argentina, emerging markets’ ability to manage those two big shocks has been a pleasant surprise to economists.
 

Waning growth in the U.S., spotlight on the Fed

In the context of the worldwide economy, 2023 was a story of U.S. exceptionalism. Despite headwinds, the U.S. economy grew beyond expectations.

No overview of the global economic outlook is complete without an examination of the U.S. economy. In the context of the worldwide economy, 2023 was a story of U.S. exceptionalism. Despite headwinds, the U.S. economy grew beyond expectations. El-Erian attributed this achievement to three factors: first, that forecasters and economists underestimated the degree to which pandemic profits and stimulus funds would continue to support spending. Second, they underestimated Americans’ willingness to keep spending, even as inflation dinged their purchasing power and diminished their confidence in the economy. Third, the fiscal side is still expansionary — but that may be about to change.

In 2024, the pace of U.S. economic growth is likely to slow. El-Erian predicted that the economy will deliver another solid performance this year, but that growth will not be as robust as it was in the latter half of 2023. However, the U.S. economy will look strong compared to the economies of countries around the world that are facing more significant headwinds.

This year, the Federal Open Market Committee is in the spotlight as economists, financial institutions, and investors anticipate reductions in interest rates. The MBA predicts three rate cuts beginning in May of this year, four more cuts in 2025, and some additional cuts in 2026 to bring the Fed funds target rate down from 5.5% to somewhere between 2.5% and 3%.
 

Commercial real estate is not a monolith

“This is not the time to paint commercial real estate with broad brushstrokes. Each property is different. Each owner is different. Each situation is different.”

What implications will this global economy have for commercial real estate in the U.S. in 2024? El-Erian warned that the biggest risk factor for the industry this year is noise. Extrapolations based on the weakest segments of the market can contaminate other parts of it — for example, regulators imposing capital requirements on a bank based on some individual troubled loans, as opposed to the whole portfolio. El-Erian said the best way to alleviate this issue is by providing information to stakeholders continuously, to help them distinguish true signal from noise.

El-Erian also emphasized the importance of conducting scenario analysis for possible outcomes aside from the baseline. Similarly, MBA’s Woodward advised, “This is not the time to paint commercial real estate with broad brushstrokes. Each property is different. Each owner is different. Each situation is different.” The MBA forecasts a roughly 25% increase in commercial mortgage originations in 2024. However, it also acknowledges that this prediction represents only one potential path for the industry, and that these forecasts depend heavily on what happens with interest rates and other factors over the course of the year.

Economists are no strangers to uncertainty, and important questions about the 2024 outlook remain: Will the U.S. economy avoid a recession and achieve a stable inflation rate? Can the U.S. avoid contamination from geopolitical risks? The commercial real estate industry needs to be prepared for a variety of potential scenarios that accommodate a variety of outcomes, positive, neutral and negative.

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