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Dodging the dangers
- Election uncertainty, ongoing wars and widespread trade tariffs…
- …have not prevented the global economy from continuing to muddle through…
- …but without a persistently big jump in productivity growth, the fiscal danger cannot be dodged indefinitely
Economic immunity
Half-way through this record year for elections, there have already been a few big surprises. Yet major disruptions to the global economy have so far not materialised.
Global growth has generally been remarkably steady: not spectacular by any means but most of the world is still muddling through amid the ongoing political and geopolitical uncertainty and even as familiar imbalances and fiscal fragilities persist. And while the pace of decline in inflation has moderated this year, there has been enough progress for more central banks, notably in Europe, to start cutting rates.
Global growth is still primarily consumer-led in much of the world
Global growth is still primarily consumer-led in much of the world, including in the emerging economies from Latin America to Eastern Europe. This is mostly driven by an improvement in real wage growth as price inflation has slowed by more than that of wages, offsetting some slowdown in employment. Stubbornly high savings rates in Europe have meant that is the main area where spending has disappointed and any acceleration from here hinges on confidence which could potentially be boosted by falling rates or dented by diminishing labour market prospects. The latter has for some time weighed on consumer confidence in mainland China.
Given global consumer goods spending is highly unlikely to accelerate from here (and our forecast is that investment spending will not either), we still anticipate a subdued recovery in world trade growth in 2024 and one that is still heavily reliant on US demand and high-tech exports. Asian exporters like Korea and particularly Taiwan should continue to fare best. Mainland China’s exports have also been doing well.
Our forecasts
The overall impact is little or no change to our growth forecasts compared with three months ago. Our 2024 global GDP forecast stays at 2.6%. One familiar exception is India following another upside surprise in Q1 and where we now project 7.3% growth this year. We also keep our 2025 global GDP growth forecast at 2.6% given that we anticipate neither much stimulus nor the emergence of much slack to provide scope for a rapid V-shaped recovery.
2.6%
Average global GDP growth forecast for 2024
(HSBC Global Research)
5.5%
Average global inflation forecast for 2024
(HSBC Global Research)
There are even fewer changes to our inflation forecasts. Our global aggregate for 2024 has fallen from 5.8% to 5.5%. We still expect the pace of improvement in inflation from here to be only gradual and uneven given the ongoing stickiness in service sector inflation and the fact the “easier” supply-driven improvements from energy prices and global supply chains that were so critical to collapsing goods price inflation have now run their course.
For the major central banks, we still expect two more rate cuts this year from the European Central Bank but only one from the Fed, which we forecast for September. This begs the question as to how far divergence between the majors’ policy rates can go and the answer probably hinges on how the anticipated rate divergence impacts the exchange rate and what that in turn means for inflation. In the emerging economies the pace of monetary easing is slowing, pausing or, in the case of Asia, the probable start date for the first rate-cut is being pushed back a little bit later.
Although there will be some outperformers, our 2025 forecasts paint a picture of a deteriorating growth-inflation trade-off, further exacerbating the fiscal challenges facing governments who will have to make difficult political choices to dodge the fiscal danger associated with budget deficits and rising debt stocks. Western governments hope to grow their way out of the debt, supported by industrial policies aimed at raising productivity. Artificial intelligence offers some scope for optimism but taxation and spending decisions will be important too.
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