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March 2024

Inflation closing in on target

Following a rapid deceleration in 2023, inflation nudged up again at the start of 2024 in many economies. This increase, in part, reflects seasonal distortions and methodological issues. But the strength of wage growth and core services inflation, alongside the sharp rise in maritime freight rates, mean many key central banks are not ready to cut interest rates just yet.

However, year-on-year rates of inflation should fall close to target by mid-year in many economies. Although core services inflation is strong, shelter price growth should soon moderate in the US, while wage growth is coming down gradually and inflation expectations remain well anchored in almost all developed market (DM) economies.

Bumpy disinflation is broadly continuing across emerging markets (EM) as well, helped by restrictive monetary policy. But there are also clear last-mile risks here too, including from the climate impact of El Niño or geopolitical volatility pushing up food prices. 

A US soft landing

We think the US economy is heading for a soft landing. The financial strength of households and firms suggests the peak impact of monetary policy tightening has passed. Meanwhile, progress on lowering inflation means a recession is not ‘necessary’ to cool price pressures.

Nonetheless, many drivers of US exceptionalism, such as household savings, fiscal support, rising labour participation rates, and a rebound in productivity should fade somewhat during 2024. So, we expect the pace of US growth to shift lower this year. 

Meanwhile, the UK and Eurozone should slowly emerge from recession-like conditions in 2024, helped by positive real wage growth. But Germany will continue to struggle from cyclical and structural headwinds to its growth model. 

Rate cuts coming

Against this backdrop, we expect major DM central banks to begin interest-rate cuts around the middle of this year. We forecast the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England will each make an initial cut in June. We expect a cumulative 100 basis points (bps), or 1 percentage point, of fed funds rate cuts this year and 125 bps in 2025. Our assessment of equilibrium rates means 2%-3% will be the eventual end point of cutting cycles.

The Bank of Japan (BoJ) will be a notable outlier. Admittedly, the data paint a mixed picture about the sustainability of Japan’s emergence from low inflation. However, a decent Shunto wage round should be enough for the BoJ to exit both negative interest rates and ‘yield curve control’ by July. 

Across EMs, cooling inflation and a high starting point for real rates give room for rate cuts this year. Easing is well underway in Latin America, although cuts in Mexico may wait until after the Fed has moved. Asian central banks didn’t hike as aggressively and growth is holding up better in much of the region, but rates are still likely to be lowered later this year.

Contrasting fortunes for China and India

Chinese policy continues to ease, with recent intervention aimed at shoring up weak equity markets. However, real estate activity and property prices show a continued slide, and the desire to hold the line on de-risking means these headwinds may continue to outweigh stimulus measures. 

We forecast 2024 gross domestic product (GDP) growth to be below target. That said, ‘Japanification’ concerns – fear of a decades-long period of economic stagnation – are overdone, with underlying inflation dynamics less concerning than the deflationary headline numbers.

By contrast, although Indian growth will slow from 2023’s heady rate, it will still be a global growth outperformer thanks to favourable structural tailwinds. Reform momentum and avoiding protectionism after Prime Minister Narendra Modi’s almost-certain re-election this year are key to further boosting the economy.

Scenarios...

Politically, our global forecast incorporates broadly unchanged US government policy. However, the election is a source of significant macro uncertainty. Former US president Donald Trump’s proposed 10% across-the-board tariff, and 60% tariff on China, would hit global trade and sentiment, push upwards on US inflation, and downwards on growth. Potential fiscal easing could support growth, but also put upwards pressure on interest rates. 

In terms of other important macro scenarios, the probability of a ‘hard landing’ in the US is still more elevated than in a typical year of the business cycle, especially as the tailwinds from high savings and strong supply-side growth fade. 

Conversely, the recent strength of US activity may point to a global ‘no landing’, in which growth remains well above trend and inflation reaccelerates. Monetary policy would have to remain tighter for longer, and the next move in policy interest rates could be upwards. This tightening could cause a more pronounced downturn further in the future, although in the near term it would be priced as reflation.

A more unambiguously upside scenario would be a global supply-side uplift, in which trend growth moved higher. This may be driven by realising more of the productivity gains from artificial intelligence (AI) earlier than we expect. This would allow strong growth to continue, without a commensurate increase in inflation. Monetary policy would still ease this year, however long-term equilibrium interest rates would move up.

China continues to pose material downside risks to the global economy. A Chinese balance sheet recession could occur as the result of a more abrupt correction in real estate alongside insufficient policy offsets. 

Finally, an escalation of the conflict in the Middle East that causes a further move up in shipping rates alongside higher oil prices could generate a big inflation shock, that also means the next move in interest rates would be upwards.