Editor’s note: As is our custom, we are devoting our last issue of the year to major themes and memorable articles from the last twelve months. We hope you have enjoyed reading our coverage as much as we have enjoyed providing it.

For those celebrating a holiday this month, please accept our best wishes for the season.  And to all, a prosperous and happy new year.

The People Have Spoken

From Bangladesh in January to Romania in December, elections were held in more than 70 countries in 2024.  Some were scheduled, others arose more suddenly. The balloting covered nations that account for well over half of global economic output. 1.6 billion votes were cast. 

We wrote about many elections individually, including those held in Taiwan, India, Mexico, the U.K., and the U.S.  We addressed core issues that were common across markets, including immigration,  infrastructure, structural reform, trade and public finances.

In general, it was a very challenging year for incumbents.  Regime change was pronounced in Britain and America; strong ruling parties in India, South Africa and Japan lost some traction. 

As always, pocketbook issues played a central role with voters. Populations are unhappy with the states of their economies, and inflation has been a particular frustration.  Rightly or wrongly, office holders were held accountable.

Many world governments are looking increasingly fragile.  Regimes in France, Germany, and South Korea fell during the year.  Political polarization has increased; wings of the spectrum have gained, while the middle is diminished.

The economic ramifications of 2024’s elections could be profound.  Deep political divisions make compromise elusive and short-termism more powerful. Odds of arriving at solutions to long-term challenges like fiscal balance, national security, technological transition and climate change have diminished.  Investor impatience with rising debt levels is being stretched, creating the potential for market volatility.

Globalization remains in retreat.  We are likely to witness another round of tariffs from Washington, with retaliation likely in the other direction.  Trade restrictions, and the uncertainty surrounding them, reduce economic growth and raise inflation.  The associated weakening of the international diplomatic order creates space for bad actors and raises tail risks.

Beyond the world’s democracies, regimes in more authoritarian countries also felt pressure in 2024.  China is struggling with a host of economic ailments, and the war in Ukraine has proven costly for Russia.

Next year’s elections won’t be nearly so numerous or impactful.  But balloting in Canada, France, and Germany will nonetheless be worth watching.  The past year has taught us to be prepared for dramatic outcomes.

Boundary Conditions

Flows of newcomers have surged in many countries since pandemic-era restrictions were lifted.  Several nations experienced record increases in population last year, and this year’s totals will also be substantial. The émigrés have garnered lots of attention, and raised a host of policy issues.

Developed countries are facing looming demographic deficits.  Postwar generations are retiring, and birth rates are falling.  At best, native born populations are growing slowly; in some countries, however, populations are declining at an accelerating rate.

Shrinking labor forces can limit growth and add to inflation.  Sustaining numbers requires an openness to immigration.  In addition, newcomers are often innovators whose inventions and entrepreneurship can add energy to an economy.

But the sheer scale of new arrivals over the past two years has challenged the ability of countries to assimilate them.  Shortages of housing and strains on social services add to tensions.  In some markets, including the United States, a significant fraction of those presenting themselves do not have visas.  The politics of immigration have consequently become even more complicated, and a source of increasing polarization.

Additional curbs on immigration are likely in many markets.  In some, deportations may increase. However justified these actions might be, they will reduce growth in the labor supply and could create shortages in sectors such as agriculture, construction, hospitality and basic health care.

And as much as nations try to suppress migration, it is not likely to abate.  War, oppression, climate change, and economic failure will lead populations to seek new homes.  International organizations and domestic agencies active in this space are struggling to sustain political and financial support.

If countries are to age gracefully, they will have to manage the calculus of demographics very carefully.  Immigration will be a critical component of that equation, but getting the numbers right will continue to be challenging.

Paper Dragon

According to the Chinese zodiac calendar, 2024 was the year of the dragon.  The dragon is considered a symbol of strength, courage and good fortune.  But the stars did not align: the nation’s economy exhibited little strength, its policymakers lacked courage in addressing the malaise, and there are no clear signs of good fortune ahead. 

The year over year pace of economic growth in China has slowed from 5.6% to 4.6% during the first three quarters of this year, raising the risk of undershooting the government’s 5% target.  As we detailed in May’s View from Asia, a property market bubble has burst, and spending has slowed.  Deflation is taking deeper hold, putting the renminbi under pressure.  A shortage of funds has forced local governments to slash spending.  China is no longer the top exporter to the U.S., with the threat of a renewed trade war looming large.  

The country’s economic and demographic predicaments are almost as bad as Japan’s.  A balance sheet recession is a real risk.  Bond markets are grappling with Japanification.  The yield on Chinese 30-year government bonds has dropped below its Japanese equivalent for the first time, reflecting persistent economic weakness and looser monetary policy.  China’s demographic outlook is worse than Japan’s was, with the country’s population outlook weaker than its neighbor’s was three decades ago. 

Beijing is struggling to find the right formula for economic stimulus.  A host of confidence-boosting announcements have failed to convince markets or businesses.  Monetary policy is becoming less effective as consumers seek to control borrowing.  Fiscal support has largely been incremental; something much more substantial is desperately needed. 

An increased cadence of action since September may help place a floor under growth, but China’s economy is unlikely to turn the corner next year.  The tone from Washington is likely to become more hostile, and internal uncertainty will remain high.  More decisive policy measures, including structural reforms, must be considered.

On January 29, 2025, the year of the snake will begin.  The snake symbolizes introspection and adaptability.  Chinese policymakers should adopt this spirit as they navigate current challenges.

Hold Your Horses

Since the onset of the pandemic, inflation has gone from being transitory to persistent to stubborn. As pandemic-era shocks receded, inflationary pressures abated.  The breadth of price increases moderated meaningfully, with extreme movements much less common.  

However, underlying inflation remains elevated in major markets, preventing a sustained return to targeted levels.  A deceleration in the goods component has been an important moderating force, but other categories have proven more stubborn.  Apart from profit margins, the relationship between the labor market and inflation has not helped: wage gains secured to sustain purchasing power have elevated service prices, creating a spiral which still has momentum in several countries.  The influx of population and rising interest rates have kept housing costs high. 

Central banks have been forced to adjust their calculus.  At the outset of the year, inflation was appearing better behaved, and risks to growth seemed more serious.  Policymakers couldn’t afford to look the other way.  Substantial easing was expected to ensure sustained economic momentum.  But while seven of the world's 10 major central banks have cut rates this year, the last mile problem surrounding inflation has proven difficult to solve.  

The effort to normalize monetary policy has occurred at different paces in different places.  After an aggressive start, the Federal Reserve has signaled more caution.  The Bank of England is in a cut-hold cadence of reduction.  The European Central Bank (ECB) has pivoted to sequential cuts amid growing fears of recession.  But with the services component of inflation still sticky, the ECB has refused to commit to a specific path. 

Without further progress in the services component, increases in consumer prices are unlikely to settle sustainably at a 2% target.  While the direction of travel for interest rates is known, the pace and destination are not quite clear yet.  

The Dollar Reigns Supreme

Heavy is the head that wears the crown. The U.S. dollar has enjoyed a year of appreciation which is likely to carry forward into 2025, for better or worse.

Many factors drive the value of a currency.  This year, it has largely been a story of interest rate differentials.  As the global inflationary cycle subsided, many of the world’s central banks began cutting rates ahead of the Federal Reserve.  The strong U.S. economy did not need the stimulus of lower rates, and with inflation still above target, the Fed had the luxury of waiting.  Combined with the advantages of the nation’s economic size, stability and openness, these higher returns make the U.S. an attractive destination for foreign investments.

Foreign exchange is always a pairwise story, with upsides and downsides accruing to both sides of a trade. A strong dollar benefits U.S. consumers with cheaper imports and more affordable international travel, which continued to climb beyond pre-pandemic volumes this year.  However, the strong dollar challenges the ability of U.S. exporters to sell higher-value products to the rest of the world, a complication as the nation tries to revive its industrial base.  The greenback’s strength reinforces its role as the global reserve currency, to the chagrin of blocs that would prefer alternatives.

The U.S. economy is far from perfect.  The nation’s fiscal outlook is unsustainable, and a series of change elections have made its policies more volatile.  But no other currency—sovereign or otherwise—offers the stability and liquidity of the dollar.

The year ahead offers little prospect for stopping the dollar’s momentum.  New policies could raise inflationary risks, which could amplify rate differentials in the dollar’s favor.  Opinions on the merits of a stronger or weaker currency are varied, but officials have relatively little control over foreign exchange markets. For the time being, King Dollar can rest comfortably on its throne.

Climate Crossroads

My mother recently shared a memory of her childhood. One of their family traditions at Christmas was digging and pushing each other’s cars out of the snow that inevitably fell during the holiday gathering. Doesn’t sound like much fun to me, but they apparently enjoyed it.

The weather during celebrations in recent winters has been much more temperate, though, and I haven’t had my shovel out in quite a while. Something in the air has changed.

This year is set to be the warmest on record and the first to breach the mark of 1.5°^C above the pre-industrial norm. The number of billion-dollar disasters in the U.S. stands at 24 through October 2024, including two hurricanes that cut destructive paths inland from the Gulf of Mexico.  Deadly flooding events struck Pakistan, Afghanistan, Brazil, Uruguay and Spain.  Heatwaves and droughts touched much of Southeast Asia, South America and even Antarctica.

Climate risk is no longer a distant threat.  Evidence has become tangible in insurance premiums: property and casualty insurers are rapidly repricing risks or altogether leaving more volatile markets. 

Remediation remains possible, but at great expense.  The UN COP29 working group estimates a global investment need of $1.3 trillion annually; this year’s contentious gathering led to a smaller commitment of $300 billion.  Participating nations face precarious finances and other urgent priorities.  Meeting this commitment may prove to be too little, too late.

Policy solutions will require long-term vision and political stability, neither of which are present in large measure around the world.  Populism is on the rise, with voters embracing skepticism of the global coordination that will be needed to address major challenges like climate change.

Drivers in snowy regions learn the skills of digging, salting, rocking and pushing to get stuck vehicles moving.  The work ahead to deal with climate risks will be a heavy lift for individuals and governments alike.