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Fiscal Shifts in 2024: A Potential Recession Looms Over the Stock Market, Says Economist David Rosenberg

While many investors are eyeing a possible smooth trajectory for the US economy, renowned economist David Rosenberg raises a cautionary flag about an impending recession in 2024. His concerns, voiced in a recent CNBC interview, highlight the potential for a downturn that could catch the market off guard, much like the scenarios in 2007 and 2000.

Rosenberg, known for his keen economic insights, argues that just because a recession hasn’t struck yet, it doesn’t mean it’s off the table. Drawing an analogy with unpredictable winter weather, he suggests that dismissing a recession based on current trends might be premature. “People who have said that the recession hasn’t happened yet therefore it’s not going to happen at all is like me sitting in my office in Toronto and saying it didn’t snow in December in Toronto, Canada so winter has been called off,” Rosenberg explained.

The economist points to fiscal stimulus as a key factor propping up the economy in 2023 amidst the Federal Reserve’s aggressive rate hikes. However, he foresees this fiscal support turning into a headwind in 2024. “Fiscal policy last year added more than 4 percentage points to nominal GDP growth… so two-thirds of the growth last year in the economy came from the juice from fiscal policy,” he noted. This boost from government spending, particularly through initiatives like the CHIPS Act, played a significant role in sustaining growth in US manufacturing.

Looking ahead to 2024, Rosenberg anticipates this fiscal stimulus morphing into a “fiscal drag” that could reduce economic growth by 1.2 percentage points. This shift, he believes, will disrupt the usual “election effect” seen in the stock market during the re-election year of a first-term President. The typical fiscal stimulus in such years, which averages a one percent GDP boost, seems unlikely this time around, primarily due to political dynamics. “The problem for the Democrats is that they don’t control Congress and the GOP is hardly going to want to play ball,” Rosenberg stated in a client note.

This expected absence of fiscal stimulus, coupled with the lingering impact of the Fed’s monetary tightening, paints a challenging picture for the economy in 2024. Rosenberg’s analysis suggests that these factors could steer the economy toward a recession.

Investors, therefore, might need to brace for a turbulent year ahead, as the fiscal tailwinds that supported growth in 2023 transform into headwinds, potentially derailing both economic stability and stock market performance.

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