A new chapter is expected to unfold in 2024, according to the Mastercard Economics Institute (MEI), with consumers and corporations facing, at times, difficult decisions about spending and investing. With interest rates, wages and prices high relative to pre-pandemic trends, many of us will prioritize resources carefully.
The backdrop, however, remains one of consumer empowerment with moderating inflation, steady real economic growth and varied regional dynamics.
While MEI believes that the global economy will feel more “normal” in 2024 than the prior three years, it is still an economy in the process of rebalancing. This means consumers and corporations will be mindful of how to prioritize their spending and investment in an environment of shifting relative price differentials and higher borrowing costs.
Adding to these macro dynamics are the continued behavioral changes by consumers in how and why they shop. In a global economy that is still fluctuating, empowered consumers are finding their equilibrium by carefully balancing prices and priorities.
FORECAST SOURCE: MASTERCARD ECONOMICS INSTITUTE. HISTORICAL DATA: VARIOUS OFFICIAL STATISTICS AGENCIES. MAP SOURCE: NATURAL EARTH, HIGHCHARTS.
NOTE: ESTIMATES ARE % CHANGE IN ANNUAL AVERAGES, EXCEPT UNEMPLOYMENT RATE ESTIMATES WHICH ARE AVERAGES AND INTEREST RATE ESTIMATES WHICH ARE END-OF-PERIOD.
THE BOUNDARIES AND NAMES SHOWN ON THIS MAP DO NOT IMPLY OFFICIAL ENDORSEMENT OR ACCEPTANCE BY MASTERCARD ECONOMICS INSTITUTE.
COLOR INDICATES VARIANCE ABOVE (BLUE) OR BELOW (ORANGE) HISTORICAL AVERAGE.
There are three common themes for the global economy: empowered consumer, easing inflationary pressure and a course correction for central banks. That said, the narrative very much differs across regions. Those differences are driven by social and political tensions, geopolitical risks, cost of living, access to credit, debt sustainability and currency depreciations.
One theme is the continued disparity between manufacturing and service economies, with service-led economies in a better position. Spain, a service-led economy, has benefited from robust domestic demand and a global focus on “experiences” over “things.” India, another service-led economy, has seen a tailwind from robust domestic demand and easing supply constraints, as reflected in both the travel industry and labor market. But Germany, a manufacturing economy, has struggled with competition, geopolitical instability and declining global demand for consumer goods.
However, MEI expects the divergence between manufacturing and service economies to narrow compared to 2023. As the global manufacturing cycle turns, the services sector runs into capacity constraints, and disinflationary trends favor increased demand for goods. In the emerging world, energy exporters will likely continue outperforming energy importers due to higher energy prices.
2024 will be a year of trade-offs. Consumers and corporations alike will make choices about how to spend and invest as the business cycle ages and growth slows. MEI is forecasting real GDP growth of 1.7% in 2024, which is a moderation from the expected 2.4% pace in 2023. Job creation is likely to slow but remain healthy, while inflationary pressures ease. This should lead the Federal Reserve to start cutting rates in the late Spring and slowly “normalize” policy.
A key theme for 2024 is the “need” and the “want.” Consumers will spend on the “need” and the “want” but not on the “impulse.” Looking back at spending trends through Q3 of 2023 to understand consumer priorities, we see spending on “wants” dominating “needs.” At the top of the list, ranking by spending growth, is spending on “movies and live performances,” which is up a stellar 31%. Taylor Swift, Beyoncé and blockbuster releases made a splash!
While MEI sees continued momentum in spending on experiences and self-care through the end of 2023, growth rates in 2024 are unlikely to be as impressive given harder “comps.” “Impulse” spending, which is less intentional and thought of as an “add on” to a shopping trip, could continue to struggle in 2024. This will result in a less bifurcated spending basket than in 2023, although there still will be clear differentiation, especially given relative price differentials and the trade-offs consumers will make.
MEI expects real GDP to increase by 0.8% in 2024 following an estimated 1.1% increase in 2023. A modest uptick in the unemployment rate is likely and underlying inflationary pressure should continue to subside. The Bank of Canada has likely concluded its hiking cycle with a policy rate of 5%, but cuts are unlikely to start until Q2 and should be gradual.
The path of the housing market in Canada is critical to the outlook:
Housing-related spending declined throughout 2022, along with the drop in home sales, but has started to show some recovery. However, with likely persistently high mortgage rates, MEI expects additional strain on housing and housing-related spending in 2024.
Two important structural dynamics could help offset the negative drag from higher rates:
1) The push toward more diversified supply chains encourage “friend shoring” – moving production to Canada and Mexico.
2) Policies to encourage immigration, which leads to stronger labor force growth.
In 2024, most of Latin America will be reaping the benefits of its tumultuous but persistent commitment to stabilizing inflation. The final stretch of the disinflation process will see a smooth slowdown in GDP growth, rather than the hard landing that typically followed high-inflation episodes in the region. The policy rate cut cycle is set to provide relief to consumers, whose debt service has climbed in the face of high rates.
Brazil and Chile have taken the lead in the region in this cycle, with Colombia and Mexico staying behind for different reasons – sticky core and food inflation in Colombia and remarkable economic resilience in Mexico. In 2024, MEI expects rate cuts to spread through the region and to support households as they consolidate their debt.
The continued easing of monetary policy will help sustain consumer spend in
interest-sensitive
sectors, while
income-sensitive
sectors are likely to lag as households control their expenses. The good news is that labor markets will remain strong in the economies that have outperformed. In addition, labor markets will finally turn the corner in the region’s underperforming economies, with real wages expected to show modest but consistent growth.
As Latin America pursues a smooth slowdown, the key downside risks are external. An economic slowdown abroad, especially in China and the US, is the greatest potential threat to Latin America’s economic performance in the year ahead.
A slowdown in China would hit the economies of South America particularly hard through a decline in demand for agricultural products and metals. Central America and the Caribbean are more vulnerable because of the US slowdown from weaker exports and lower remittances.
Another pressing risk is the impact of the El Niño on food inflation – droughts in particular regions and intense storms in others may affect agricultural production and transport.
In 2024, European GDP growth is expected to accelerate modestly, driven primarily by rising consumer purchasing power as wage growth outpaces inflation and by an improvement in manufacturing. However, GDP growth will remain below trend as high interest rates and tighter fiscal policy prevent a more meaningful rebound.
The divergent economic performance between the services and the manufacturing sectors is likely to narrow. Services face capacity constraints and higher prices, while, manufacturing is likely to benefit from higher demand for goods, lower prices relative to services, a more favorable inventory cycle and a lower drag from high energy prices and interest rates.
MEI also expects more convergence in spending between relatively more affluent and less affluent consumers. More affluent consumers were less impacted by high inflation - driven by essential items such as energy and food - and maintained their discretionary spending.
Less affluent consumers prioritized spending on essentials and were forced to pull back on discretionary spending. High interest rates are now forcing more affluent consumers to prioritize higher mortgage payments so they are likely to reduce discretionary spending. Less affluent consumers will feel more of an impact from disinflation, allowing them to increase discretionary spending. This convergence may also impact the breakdown of consumer spending across categories.
In 2024, MEI expects headline GDP growth to increase in the GCC, as likely higher oil prices and possible production increases support the recovery in the oil sector.
Meanwhile, diversification efforts supported by expansionary fiscal policy will drive the non-oil economy through higher investment, which will in turn support employment and domestic consumption. While a significant investment drive for more development through giga projects - large-scale and ambitious infrastructure or capital project investments - is underway in Saudi Arabia, the United Arab Emirates (UAE) seeks to maintain its position as the regional trade and investment hub.
Turkey and Egypt are addressing their macroeconomic imbalances. Egypt was forced to devalue its currency, which led to high inflation and the central bank increasing rates by a cumulative 1,100bps. Although the country received liquidity support from the International Monetary Fund (IMF) and its GCC partners, supply of hard currency is still insufficient to support the needs of the economy and a further currency and rate adjustment is likely.
Turkey, on the other hand, has reversed its expansionary policy stance, and higher interest rates are taking the heat from credit growth, which will weigh on consumption and job creation.
MEI expects tourism to remain the bright spot for the region’s economies. The GCC’s strong push to grow its tourism sector has made it one of the fastest growing destinations in the world. In 2023, the GCC is expected to have registered a 22% increase in inbound tourist spending compared to 2019, far outpacing the global average (see chart below).
Turkey and Egypt, on the other hand, are benefiting as lower-cost destinations for price-sensitive Europeans who have traded down their summer holidays in Southern Europe. In 2023, Turkey, Egypt, Tunisia and UAE were in the top 10 fastest growing destinations for Europeans, compared to 2022, while bookings to Italy, Spain, Portugal and Greece contracted over the same time period. We expect this trend to accelerate in 2024 as more middle-class Europeans, who are the group that travels the most, are forced to prioritize their mortgage payments.
2024 is set to be a year of recalibration. The Asia Pacific economies are likely to experience a pickup in GDP growth but remain below trend.
For at least two years under pandemic restrictions, we saw elevated spending on goods. But in 2022 and 2023, services outperformed manufacturing as the reopening of economies globally allowed for the release of pent-up consumer demand to get out and about. Asian manufacturers, which play a key role in meeting global export demand, were negatively impacted as a result. As pent-up, out-and-about demand is progressively fulfilled, we expect the demand for goods to return, driving a convergence in performance between manufacturing and services in the region.
In the aggregate, MEI expects Asia Pacific consumer spending to be resilient, supported by tight labor markets and a catch up of inflation-adjusted wages. MEI also expects to see some easing of monetary policy, with rate cuts likely in Australia, New Zealand and across most of north and southeast Asia.
Under the surface, however, we expect a reprioritization of spend between sub-categories across travel, discretionary goods and essentials. Economies in ASEAN and Oceania will enter their third year without pandemic restrictions in 2024. The progressive fulfilment of out-and-about demand should support a rotation of spend back into goods. India has remained relatively resilient assisted by domestic demand. Consumer preference in 2023 has ranged from spending on travel and tourism to retail therapy, which could continue in 2024. Meanwhile, Northeast Asian economies, which reopened in late 2022 or early 2023, may continue to see out-and-about services outperform for a good part of 2024.
In a region as economically diverse as Asia Pacific there have been differences in central bank policies. Economies like Australia and New Zealand are now seeing interest rates above pre-pandemic trend levels, while Japan and mainland China have persisted with easy monetary policy. This lends itself to different paths for household budgets, depending on whether mortgage funding costs rose sharply or not. Income disparities between the affluent and mass market consumer also tend to be wider in emerging than developed economies. Excess savings also are more skewed to higher income households, while mass market consumers also spend a higher portion of their wallet on essentials, which have seen bigger relative price rises in many markets.
Consumer spending growth is likely to trend weaker in 2024 vs. 2023 as pent-up demand from reopening wanes. While the national unemployment rate is low, white-collar pay cuts will likely weigh on aggregate consumer spending momentum.
The story for 2024 will be a further recovery of Chinese outbound travel as more destinations are added to the approved list for group travel, which typically have less stringent visa restrictions versus individual travel. This will continue to support tourism spending.
The recovery for different corridors, however, will hinge on the authorities’ prioritization of flight capacity allocation. Destinations like Singapore, Malaysia, Vietnam and Thailand were early outperformers in 2023. Destinations in Northeast Asia, North America and Europe should catch up in 2024.
Domestic travel should also remain strong. The recovery in outbound spending will continue to be closely watched as the outbound recovery continues. Tourists from the Chinese Mainland accounted for 15% of international tourism spending in 2019, according to the World Travel and Tourism Council. Pre-pandemic, they focused heavily on retail, particularly on luxury goods when traveling internationally. Based on Mastercard’s cross-border insights, spending on experiences has seen a stronger recovery among early travelers out of the Chinese Mainland. This shift in travel spending priorities suggests that tourism authorities and retailers globally may have to adapt their strategies to maintain their appeal to Chinese travelers.
Meanwhile, fixed asset investment growth is unlikely to rebound materially. The quicker-than-anticipated waning of the 2023 post-pandemic spending boom exposed the weak sentiment of the consumer despite minimal inflationary pressures, and this is unlikely to be supportive of services business investment.
Construction investment is not likely to be a strong growth contributor. Some housing construction had resumed by July 2023, but ongoing property sector challenges around demand and financing continue to weigh heavily on new housing construction, which remains in double digit contraction. While the government has eased homebuyer restrictions to stimulate demand, the effectiveness of the scheme remains to be seen. In addition, the problem of uncertainty around the debt repayment ability of developers will continue to weigh on new property investment.
Monetary stimulus will still be the lever of choice for the government. Scope for large-scale fiscal stimulus is slim given that the central government remains committed to public deleveraging and is reluctant to give cash handouts. As such, monetary conditions may be eased further still. However, higher rates in the US could keep selling pressure on the Chinese yuan, limiting the ability for additional monetary policy easing out of China.
Empowered consumers -- a key theme for 2024 -- will be the ones to decide the timing of their purchases and how often they'll return purchases. Consumers are more empowered after the last few years of global supply chain bottlenecks that lengthened delivery times and elevated prices for goods, which stretched household budgets. Now that supply chains have untangled, consumers can once again wait until the last minute to purchase goods with few constraints and search for the best promotions. If they choose to return goods, they could be compelled to make new purchases.
MEI used aggregated and anonymized Mastercard insights to analyze returns for apparel, travel items and recreational goods (which we are calling “retail” for our analysis) across 10 countries, by mode of transaction. As shown in the chart below, return rates are higher for e-commerce transactions than in-person transactions. Relative to 2019, return rates are higher for e-commerce but roughly unchanged for in-person transactions. Germany, Spain and the UK have the highest e-commerce return rates, and Canada’s in-store return rates far exceed other countries at 9%.
The higher rate of returns is indicative of the success of the digital transformation in the retail world which, at times, could end up increasing overall sales volume. The pandemic accelerated e-commerce penetration globally, giving retailers, especially smaller ones, the opportunity to reach more consumers anywhere at any time.
Consumers like options. They still value shopping in-store. MEI estimates that a large share of spending remains in the store, but it varies by sector -- for example in the US, clothing stores in-store share is 73% but for electric-appliance stores it is only 34% while for grocery stores it is 98% (based on Mastercard’s aggregated and anonymized insights, controlling for the non-card share of spending). But in this world of online shopping, the home is another fitting room and consumers oftentimes seek to replicate in-store shopping by trying on different styles and sizes. The option to return goods bought online via mail or at physical stores becomes invaluable. Retailers should ensure a smooth and reliable delivery of goods to consumers, and facilitate a free and easy, omnichannel return experience.
The experiences of the last few years have forced retailers to become even more resilient to unforeseen bottlenecks, with many moving away from just-in-time to just-in-case inventory management. Larger retailers operating at scale have sophisticated inventory management tools and logistics systems to increase efficiencies and allow for smoother shopping and returns experiences. However, for smaller retailers with less resources, the returns process is likely more inefficient and expensive, putting them at a disadvantage.
For the empowered consumer in search of deals, more returns means more items at discounted prices. This is an important dimension to MEI’s outlook for inflationary pressure to moderate, particularly in the goods economy. With returns tending to peak in January, after the holiday shopping season, these trends should unfold soon.
Risks to the economic outlook are two-sided. We address some of the most critical factors to monitor, outlining how they could impact the trajectory for the economy on the downside and upside.
Conflicts between countries threaten to disrupt global supply chains, drive up commodity prices and disrupt capital flows. Business and consumer confidence could dampen, while the global travel industry could be impacted in the event of significant escalation. The spread of misinformation paired with generative AI tools is a nascent – yet potent – risk to watch. On the other hand, there could be positive developments on this front. A conflict resolution in Ukraine or in Gaza, as well as improved relations between China and the West, could reduce uncertainties and support global trade, presenting upside risk to global growth.
If inflation remains high, the trade-off for central banks would become more acute. Tighter monetary policy – higher interest rates – is effective at reducing inflation but also compromises real economic growth. The opposite would happen if inflation were to decelerate more quickly than expected, strengthening consumers’ purchasing power, providing businesses with a stable environment for investment, and allowing central banks to loosen policy more quickly.
The abrupt pace of rate increases in the past two years could reveal more cracks and vulnerabilities in the financial system. But on the upside, concerns over financial instability coming out of the Great Financial Crisis has prompted banks to maintain strong capital buffers. Prudent risk management is key to navigate this complex environment and future developments.
Risks around the Chinese economy remain in focus due to the debt challenges in the property and local government sectors. While the Chinese government has been reluctant to provide significant policy support to help spur the Chinese economy thus far, a shift toward more expansive policy could lead to stronger growth in China.
The increasing severity of climate disasters intensifies risks for businesses, consumers and policymakers. As weather patterns become less predictable, global trade, agriculture and migration routes are at greater risk, presenting the need for nimbleness and adaptiveness. Businesses may need to prioritize omnichannel strategies, consumers may need to take climate into greater consideration when choosing where to live and policymakers will need to reinforce climate-friendly policies. However, this is well understood by policymakers and to achieve the goal of carbon neutrality by 2050, significant investment in energy and transport infrastructure are required, presenting growth opportunities for economies around the world.
In 2024, MEI believes the global economy will still be finding a new balance. Relative to the prior three years, it will feel more “normal” but not the normal of the pre-pandemic period. Instead, MEI expects inflation to be stickier and interest rates more elevated than the last cycle.
This rebalancing has been quicker for real economic activity. Growth has already slowed from the red-hot, post-Covid rebound and MEI now expects a less volatile environment ahead. This is particularly true in the two highest growth economies — China and India. Both will likely see some moderation, albeit China more than India. The developed economies – particularly the US and Europe – have already seen a stabilization in real growth, although the composition of spending will continue to shift. In an environment of somewhat higher interest rates, sectors that are most rate sensitive could remain under more pressure.
The most important factor to underscore is that MEI believes the consumer, globally, is in good financial shape. A strong labor market and healthy household balance sheets, on aggregate, should underpin spending. That said, it is worth monitoring how households cope with a higher payment rate for outstanding debt, a risk addressed above.
While our forecast is for a soft landing with an easing of inflation and interest rates, there are many risks to monitor. Our main concern is a combination of geo-political shocks to growth and sticky high inflation that creates a challenge for central banks. The main upside risk is that a new technology can trigger a second “new paradigm” productivity boom, and perhaps that’s possible with generative AI or whatever else emerges in 2024. However, history shows that the timing and magnitude of such a meaningful shift is very hard to pin down. Here, at the Mastercard Economics Institute, we will be staying on watch.
About the Mastercard Economics Institute
Mastercard Economics Institute launched in 2020 to analyze macroeconomic trends through the lens of the consumer. A team of economists, analysts and data scientists draws on Mastercard insights - including Mastercard SpendingPulse™ - and third-party data to deliver regular reporting on economic issues for key customers, partners and policymakers.
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