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Are We Headed for Another Global Recession?

Dec 19, 2023

2023 is the 60th anniversary of Richard and Robert Sherman's song, “It's a Small World (After All).” The world didn't seem so small when America entered the 1960s, but the Sherman Brothers wrote that little song soon after the Cuban Missile Crisis had driven home to people around the globe just how small nuclear weapons had made the world.

Today, the smallness of the world can be seen everywhere we turn. You can open an app and with a few clicks, buy products from virtually anywhere in the world, then have them delivered to your doorstep in two days or less. It's the same for consumers in other countries who buy our products. For many of us, what's happening in Europe or Asia can have a big impact on our jobs and our well-being.

So what should we expect from the global economy next year? First, we know it'll be different. The effects of Covid were still coursing through the global system in 2023. Inflation was high, and central banks around the world were raising interest rates in an attempt to tame it. Higher interest rates were slow in most major economies, although the U.S. was an exception.

China started the year strong after its draconian lockdowns were lifted, but then sputtered and lost momentum as its real estate markets tanked and consumer spending followed suit. Thanks to a strong job market and robust consumer spending, the U.S. was an outlier this year. Gross domestic product grew five times faster than forecast at the beginning of the year. Third quarter GDP grew at a whopping 8.5%, more than four times the average annual rate of the last 20 years. U.S. consumer spending lifted other countries that might have slipped into recession without our demand for their products. But that dynamic is unlikely to recur next year. Our economy is expected to slow. While that's not good news, there are also signs that inflation and interest rates are falling and are likely to keep falling next year.

Conditions in China, the other big driver of the global system, are expected to continue to deteriorate. Its real estate sector will keep eroding, sapping consumer confidence and undermining job growth. Youth unemployment sits at 21%, a number that is suspect, like many others, statistics reported by the Chinese government. If that number keeps getting worse, they'll probably stop reporting it. Oh, wait, they already have. Over the 20 years preceding the Covid pandemic, China posted annual growth rates averaging almost 10%. Next year, it'll be less than half that, which could cause trouble for Chinese President XI. As for Europe, the big four, Germany, France, Great Britain and Italy will all see growth of less than 1%, a margin that could easily slip into negative territory and a recession.

So what does this mean for your portfolio? Gold is often thought of as an inflation hedge, but since markets became convinced that inflation was falling two months ago, gold has rallied by $210 per ounce, an increase of almost 12% in only 60 days. Do you have another asset that has posted results like that? I believe we can expect more of this in 2024. Falling inflation, falling interest rates, softening economies here and abroad, all providing support for this remarkable rally in gold.

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