Future Prospects for the Global Economy

Our Spring 2024 Global Economic Outlook expects the ECB to start cutting interest rates before other central banks in advanced economies. Why do we think this? 

Following aggressive monetary tightening and the normalisation of energy prices, headline inflation rates have fallen significantly in advanced economies compared to their peak levels in the second half of 2022. However, since the second half of 2023, inflation in the United States has remained relatively flat at above 3 per cent. The latest CPI figures show headline inflation at 3.4 per cent, core inflation at 3.6 per cent and services inflation at 5.3 per cent in April, while wage growth remains above 5 per cent, reflecting continued strong economic activity.

These underlying indicators suggest that inflation may be somewhat sticky in the United States and that getting inflation sustainably down to 2 per cent may be some way off. Accordingly, the Federal Reserve (Fed) has made it clear in their latest Federal Open Market Committee (FOMC) statement that they will not reduce the target range for the federal funds rate until they have greater confidence that inflation is moving sustainably towards 2 per cent. In line with this, we do not expect any rate cuts from the Fed until September.

In contrast, inflation in the Euro Area has continued to fall steadily towards target rates since the beginning of this year. Although core and services inflation rates are slightly higher than headline rates, they are also slowing steadily mainly due to sluggish economic activity. In their latest press release, the European Central Bank (ECB) indicated that it would be appropriate to consider cutting interest rates if confidence increases that inflation is heading back to target levels. Thus, we expect the ECB to start cutting rates earlier than the Fed, possibly in June.

I should also highlight the variability among advanced economy central banks in their interest rate decisions. For instance, the Bank of Japan ended its negative interest rate policy by raising rates for the first time since 2007 on the back of depreciating currency. Conversely, the Swedish Riksbank recently reduced interest rates as inflation was approaching target levels and announced that it may reduce rates two more times in the second half of this year. All in all, we can say that the monetary loosening cycle is beginning to start in advanced economies, but central banks remain more cautious regarding the potential upside risks to inflation.

The latest Outlook also forecasts that GDP growth will be slightly slower in 2024, but still expects the majority of countries to perform better compared to 2023. Are brighter prospects around the corner for the global economy?

In our Spring 2024 Global Economic Outlook, we forecast global GDP growth to drop slightly  to 3.1 per cent in 2024 from 3.2 per cent in 2023. Although this represents a slightly worse performance for the global economy, it mainly reflects weaker outlooks in emerging economies, particularly in India, Brazil, Russia and Turkey. However, out of 47 countries that we forecast individually, 29 countries (59 per cent of the total) are expected to have higher GDP growth rates in 2024 than in 2023. Moreover, with the exception of Argentina, we do not expect a recession in any of those countries in 2024. Looking ahead, we anticipate 42 out of the 47 countries to experience higher growth rates in 2025, driven by looser monetary policies and lower inflation.

That said, on a broader scale, we see that global GDP growth remains stuck at around 3 per cent. In addition to the impact of higher real interest rates, this may also suggest a “new normal” for the global economy, which is grappling with several structural issues. Advanced economies are facing challenges related to unfavourable demographics, climate adaptation, digital transformation and the fragmentation of global trade. Meanwhile, growth prospects in emerging economies may also be declining. As Rodrik and Stiglitz (2024) argue, relying solely on an export-oriented industrial strategy may not be sufficient for emerging economies in the face of global challenges like new technologies, climate change and the future of globalisation.

Have rising geopolitical tensions had any measurable impact on the global economy yet? Looking forward, what do you foresee to be the primary risks to the outlook for the global economy?

We continue to view geopolitical tensions as the main risks to our forecast for the global economy. In particular, the ongoing Houthi attacks in the Red Sea have increased shipping costs and resulted in longer journey routes. Considering that around 12 per cent of global trade passes through the Red Sea area, this may have a knock-on effect on consumer inflation, especially for European countries that are more dependent on this trade route for their imports. Additionally, the continuing conflict in Gaza continues to impact the global economy, especially through oil prices, which have already increased by over 10 per cent since the end of last year.

In addition to these, there are potential risks to the global economy arising from the upcoming US elections. Although the actual impact of any policy changes will only take effect next year when the new President takes office, pre-election uncertainties can significantly impact global financial markets.

There are, of course, other risks to the global economy. One issue from the United States concerns public debt sustainability and the need for fiscal consolidation. Our analysis based on NiGEM simulations shows that an aggressive fiscal consolidation may lower US GDP by around 2-3 per cent by 2030. Another risk is the possibility of US dollar appreciation due to a delay in rate cuts by the Fed. This could potentially slow the disinflationary process in advanced economies and reduce capital flows to emerging economies.

Another risk we have been monitoring for quite some time is the economic performance of China. Although the Chinese economy rebounded in 2023 with growth of 5.2 per cent, the medium-term outlook is weak due to problems in the real estate sector, high unemployment, and dampened business and consumer confidence. In addition, President Biden’s tariff increases on electric vehicles, semiconductors, and other industrial goods highlight the importance of geopolitical fragmentation for the Chinese economy.