Odds of a soft landing in 2024 at 55% — and a 30% chance that the U.S. will slip into a recession “Optimism is fine, but pay attention to economic headwinds and risks. ”

What happens in the United States does not stay in the United States. The global economy depends on America to act as a main engine of growth, and global financial markets depend on U.S. investors’ outsize appetite for risk. This became particularly evident in 2023 when major economies like Japan and the United Kingdom slipped into recession, Germany narrowly avoided one, and China grappled with obstacles to growth and pockets of high debt.

But whether the U.S. economy can drive global growth in 2024 depends on the answers to three timely questions:

First, can the U.S. economy maintain its current growth momentum and achieve the softest of soft landings? Second, can it remain resilient in the face of domestic political divisions and geopolitical uncertainties around the world? And lastly, will investors be able to secure sufficient liquidity to refinance debts accumulated during the era of artificially low interest rates and exceptionally high liquidity injections by central banks?

Based on current market prices, investors believe the answer to all three questions is a solid yes. Similarly, many economists are optimistic about the U.S. economy, albeit with slightly less enthusiasm than that exhibited by capital markets.

I find myself taking a more nuanced view. Consider the three key issues:

The U.S. economy undoubtedly holds two significant advantages over other major economies: Its current growth engines are more dynamic, and it has taken significant measures to foster and invest in future growth drivers. This helps to explain why the U.S. exceeded expectations in 2023, with GDP growing by 4.9% and 3.3% in the third and fourth quarters, respectively. By contrast, the German, Japanese and U.K. economies contracted, while China, grappling with cyclical issues, risked being pulled into the dreaded middle-income trap.

“There is a greater risk that the U.S. Federal Reserve’s overreliance on historical data will lead to another monetary-policy mistake.”

These huge advantages set the U.S. apart from other developed economies. Moreover, its comparative advantages will continue to strengthen unless other countries shift swiftly and decisively toward policies that support growth and increase productivity.

But the American economy also faces powerful headwinds. The U.S. has entered 2024 with weaker household balance sheets, marked by lower savings and higher debt levels. This reduces the future effectiveness of consumer spending as a direct and indirect growth driver. Moreover, with inflation receding, there is a greater risk that the U.S. Federal Reserve’s overreliance on historical data will lead to another monetary-policy mistake.

These challenges are compounded by domestic and geopolitical uncertainties that have not been adequately reflected in market-risk premia and economic assessments. The possibility of escalation in the Middle East is considerable as the already distressing number of civilian deaths and human suffering in Gaza rises further. The war in Ukraine risks tilting in a manner that threatens wider conflict over time. Meanwhile, the ongoing tensions between China and the U.S. show little sign of abating. Elections this year in dozens of developed and developing countries add another layer of uncertainty, as political shifts could trigger new supply shocks and further weaponization of trade and finance.

The third issue is whether markets can navigate the refinancing legacy of excessive risk-taking fueled by years of artificially low interest rates, massive liquidity injections, and an unhealthy codependency between the Fed and financial markets. The commercial real-estate sector, where roughly $1.5 trillion in debt is set to mature by the end of 2025, is a prime example. But there are other areas of concern, especially within the lightly regulated and insufficiently understood non-banking sector.