Global economy resilient in the face of speed bumps

Please note: All data referenced in this article are sourced from Bloomberg unless otherwise stated, and are accurate at the time of publishing.

Despite a turbulent start to the year geopolitically speaking, delays on anticipated interest rate cuts and June’s Indian and European Union elections, the outlook for the global economy seems little different than it was in January. 

The speed with which inflation rates return towards leading central banks’ targets, and the vibrancy of the global economy, will be key indicators of growth prospects. There are some reasons for cheer over the mild upbeat signs around the outlook in China, although more caution is warranted over US growth. 

Meanwhile, although the eurozone and UK economies have recovered from last year’s recession, as defined by two consecutive quarters of shrinking economic activity, they are expected to remain subdued for the rest of 2024. 

Inflation on the mend 

Price pressures have been restrained this year, aided by weaker fuel costs, prospects of interest rates being higher for longer than had been expected and fewer supply-side problems. That said, ‘stickier’ inflation has disappointed many policymakers and economists alike, so slowing the pace of rate cuts that had been factored in earlier in the year. 

Global consumer prices are likely to be 2.6% higher in 2024 over those in 2023, and 2.4% up 2025 (see table). The weaker growth outlook will probably affect the pace of the expected interest rate cuts, with rates set to be higher for longer in several top-ten economies. 

Source: Barclays Investment Bank, Barclays Private Bank, June 2024

Has the US economy run out of steam?

The first few months of 2024 has shown signs that the American economy is hitting turbulence and consequently growth appears to be slowing. Domestic consumers appear to have exhausted the excess savings built up during the COVID-19 pandemic. A worsening unemployment rate would not help. In addition, domestic price increases look set to remain above the central bank’s 2% target in 2024 and 2025.  

With inflation proving to be stickier than policymakers expected at the start of the year, the much-vaunted interest rate cuts have been delayed. While inflation is set to hit the target ultimately, the US Federal Reserve is expected to make one quarter-point cut this year, and then four more such moves in 2025, taking the federal funds target range to 4-4.25% at the end of that period. 

After a strong burst of growth in 2023, the American economy will probably slow to around 2.5% growth this year and 1.6% next, remaining better than most of its developed peers.  

Europe on the up, but not by much 

After finishing 2023 in recession, some sort of bounce was anticipated this year. And, a recovery of sorts has materialised, while the bloc’s unemployment rate continues to hover around 6.5%, which remains low by historical standards. 

European price pressures have eased in 2024 but remain above target. That said, soft core goods inflation and lower energy prices are a positive. In turn, helping inflation to decelerate to around 2.3% in 2024 and 2.1% in 2025. With price pressures heading in the right direction, interest rate cuts are looking more likely. Three quarter-point cuts could be seen this year, potentially taking the deposit rate to 2.5% by the end of this year. For all the seemingly upbeat news, eurozone growth is likely to be tepid for some time. 

UK on the mend 

The UK started 2024 with a bang, as shoppers found more mojo and helped the economy to chalk up its quickest acceleration in quarterly growth since 2021 in the first three months. While there are signs of weakness in the labour market, and with the unemployment rate anticipated to peak at 4.6% by the end of 2024, this should keep a lid on pay rises and so reduce inflationary pressures. Indeed, year-on-year price rises seem likely to return to the 2% target in 2025.

In addition to weaker inflationary pressures, the economy is expected to grow by around 0.8% in 2024, and a tad more, at 1%, in 2025. As such, the Bank of England should have confidence to start cutting interest rates, perhaps by a quarter point in August and then two more similar moves later in the year.  

China’s fragile recovery

Despite signs of encouraging Chinese economic expansion this year, the recovery remains mixed. Racier global demand has aided industrial production and exports. However, the troubled real estate sector and infrastructure investment levels continue to weigh on retail sales. Furthermore, consumer demand and the labour market remain under pressure. 

Property investment plunged by 10.5% in April, with house prices still weakening. In response, Chinese policymakers have launched a series of supportive polices this year. Given the positive start to the year, the country is expected to hit the government’s 5% growth target for 2024, though down on the 5.2% growth achieved in 2023. 

A resilient year ahead 

Although several geopolitical challenges lie ahead, anticipated global growth of around 3.1% this year and 3.0% next would be an achievement, even if below the long-term historical norm. As such, the pace of expansion, degree to which inflation eases and the speed of rate cuts will be a prime focus for investors and central bankers. 

With elections due in the US and UK before 2024 is out, politics is likely to have a profound effect on investor attention (even if markets typically move to their own beat over the longer term)s. This, in addition to weaker consumer spending power and increased need for fiscal restraint, will influence how quickly the economy recovers in coming months.  

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