We tend to think about the economy in binary terms. Recession: yes or no? Will markets be up or down? Will interest rates rise or fall? The answer to the latter question, at least in the US, appears to be “fall,” as the Federal Reserve held rates steady during its meeting last week while hinting that we could see as many as three rate cuts next year. That has, of course, buoyed stock markets, which have gone long on the soft landing story. But economic reality in 2024 is likely to be far less binary, and much more nuanced, than many market participants and policymakers believe.There are three reasons for this. The first and most obvious is that the pandemic and the policy response to it has made it very difficult to predict where the US and global economy will be based on old models. Employment, wages and other key metrics are refusing to follow historic trends in many places. Second, decoupling and the rise of industrial policy have introduced a new dynamic into fiscal policy and trade relations — one that will continue to play out no matter who wins the US presidential election next year.

And third, there is an ongoing interest rate arbitrage effecting business and consumers that still has years to run. Yes, rates are now far higher than they have been for several decades, and even if we get some cuts in 2024, that will still be the case. But many borrowers locked in cheap financing before inflation hit and rates rose. Those costs will reset over time, not all at once, which means we may see more slow moving, unpredictable disruptions, rather than a single big event.

Take the first issue, namely that of the pandemic and the massive fiscal stimulus that followed. On the one hand, the fact that Covid savings, particularly in the US, have been largely spent down from their peak, coupled with somewhat slower job growth, validates the idea that we could see less inflation and a slightly weaker economy in 2024.