2024 ushered in the Goldilocks economy as Covid disruptions finally faded
We’re nearly at the end of 2024, and it’s turned out to be a pretty good year for economies – especially the US.
As distortions from Covid have finally faded, data shows major economies have gotten back to normal and are in a bit of a “Goldilocks” state – not too hot, not too cold.
Labor markets have softened, but are still generally healthy
One place where that’s evident is in labor markets.
In the last few years, we’ve seen both extremes for labor markets – big spikes in unemployment during the early part of Covid (chart below), and then historically tight labor markets as economies reopened and there was a shortage of workers.
After a couple years of higher central bank rates, unemployment rates have picked up over the last year or so in the US (dark blue line), Canada (red line), Sweden (light blue line), and the UK (green line). But they’re only up to levels seen in the last (2010s) economic expansion, so labor markets are now mostly back to normal or just a little tight, but not historically so.
Inflation is back near 2% targets around the world
Some softening in labor markets has helped get inflation back to normal, too.
Initially, we saw inflation increase during Covid due to supply chain disruptions, which boosted prices of goods, energy, and food. Then, when economies reopened and we saw labor shortages, we also got wage inflation, which has taken a couple years to get back to normal.
So, with supply chain fixed and wage growth cooling, headline inflation is pretty much back around 2% in the major economies (chart below).
Despite higher rates, GDP growth was strong enough to avoid recession
The main tool central banks used to get inflation back under control was hiking rates.
Somewhat surprisingly, they managed to cool off economies enough to bring down inflation, but not so much that they caused recession (it was a close call in some countries, though).
This is especially true of the US, where we have a 4.2% unemployment rate, 2.3% inflation rate, and are on pace for nearly 3% real GDP growth (chart below, light blue bar). That puts the US on pace for one of the strongest growth rates among advanced economies (blue and yellow bars).
As rates keep falling in 2025, that should help boost growth
With inflation back under control, the major central banks were able to shift their focus to boosting economic growth by cutting rates this year.
The Bank of Canada and Sweden’s Riksbank have each cut 125bps already this year. The Fed (chart below, red line) and European Central Bank (blue line) have both cut 75bps, with additional cuts are expected later this month, and the Bank of England has cut 50bps (green line).
And more cuts are expected next year (lighter green, red, and blue lines).
These rate cuts should help support growth in 2025, since it will make it cheaper for consumers and businesses to borrow, boosting economic demand. That’s why some project broadly stronger economic growth in 2025 than in 2024.
And if economies are growing and people are spending, that should boost companies’ revenues… which is good for markets.
The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED. © 2024. Nasdaq, Inc. All Rights Reserved.