Global economy fires up the growth engines

Europe trundles along

The European Central Bank (ECB) recently lowered its growth and inflation forecasts amid the prolonged downturn in domestic demand. There are, however, some early signs that the intensity of the downturn is starting to moderate. February’s composite purchasing mangers’ index (PMI) output measure rose to an eight-month high, as improving demand for services helped to offset the weakness in manufacturing.  

We expect the eurozone to stagnate through the first half of this year, before returning to trend growth over the rest of 2024 as pay growth outstrips inflation and easier monetary policy prompts more private consumption and investment. Output expansion is pencilled in at 0.4% for this year, before improving to 1.3% in 2025. 

Price pressures in the bloc have been easing driven by lower levels on food, alcohol and core goods inflation. Consumer prices rose 2.4% year-on-year in March, marginally below the consensus estimate of 2.5%. Core inflation also decelerated at a higher rate than expected, coming in at 2.9%.

The latest figures suggest that price increases will continue to moderate in the coming months, although the disinflationary momentum is starting to slow. We expect headline CPI to average 2.4% this year and 2% in 2025. 

While the discussions around cutting interest rates have clearly begun, the timeframe remains debateable. Members of the ECB’s Governing Council are starting to become concerned that the policy is too restrictive, and risks are growing that they will undershoot the inflation target in the medium term. We expect the first cuts to be seen in June, with the deposit rate finishing the year at 2.75%. 

UK prospects seem lacklustre

Following the mild recession seen in the second half of 2023, the UK economy returned to growth in January, as gross domestic product (GDP) reached 0.2%. Strong demand for services helped to drive growth as consumers took advantage of the January sales. 

Construction was particularly robust, aided by lower interest rates, a stable housing market and better weather. Meanwhile, industrial production suffered as supply chain disruption from shipping activity in the Red Sea weighed on manufacturing.

Despite the recent uptick in activity, the outlook remains lacklustre and at the mercy of geopolitical events, as well as the timing of rate cuts and inflation trends. The UK’s low productivity growth is also a further area of concern that will need to be addressed. With GDP growth of just 0.1% on the cards this year, the economy’s margin for error is razor-thin. 

Talking of the timing of UK rate cuts, the annual inflation rate decelerated to 3.4% in February, and we expect headline CPI to fall below the 2% target level as the year progresses. 

The Monetary Policy Committee (MPC) is likely to be laser-focused on the incoming inflation, labour market and growth data for the first quarter. These should pave the way for a first rate cut, currently expected to be in June, with more to follow and the Bank Rate forecast to finish the year at 4%. 

India heads the growth charts

The Indian economy has expanded at a truly impressive rate over the past few years and has the potential to exert an ever-more important influence on global growth. The country has benefited from a significant period of liberalisation and has made tangible progress in developing free-trade agreements.

Over the past decade, the number of people living in extreme poverty has halved and the proportion of society in the middle classes has grown at pace. India has set itself the target of becoming a high middle-income economy by 2047, presenting an important progression given that private consumption now accounts for more than of 60% of its GDP. 

The combination of strong consumer demand, soaring levels of private investment, increased infrastructure spending and supportive government policies, has helped the economy to grow by 7.7% in 2023. Recent surveys show that business optimism and consumer confidence levels are high, and the economy is forecast to grow by 6.8% this year and 7% in 2025. 

With inflation continuing to hover above the target range and resilient economic activity, it’s not surprising that the central bank’s MPC kept its key interest rate unchanged in February at 6.5%, for the sixth straight meeting. Once again, the central bank reiterated its intention to maintain their policy stance of “withdrawal of accommodation”. However, assuming inflation trends lower, the MPC is expected to start considering rate cuts in the summer. The first quarter-point reduction is forecast for August with the repo rate ending the year at 6%.  

India’s ability to continue to outperform the global economy will depend on  how well it takes advantage of its enormous population, and whether it encourages more women into the workforce, along with more domestic consumption.  

China’s growth target still looks optimistic 

At the National People’s Congress held in February, Chinese officials unveiled their key economic targets for the year. These include a 5% target growth rate, a fiscal deficit of 3% of GDP and an unemployment rate of 5%. 

While the growth target could be achieved, the downside risks without a more significant fiscal package are clear. China’s manufacturing and construction sectors remain under pressure, small- and medium-sized companies are struggling and underlying demand is weak. 

Given the negative wealth effects of declining house prices, elevated levels of household debt and the subdued labour market, hopes of a sustained rebound in services and consumption look unlikely. Our base case is for GDP to expand by 4.4% in 2024. 

China’s economic outlook is also tainted by some long-term underlying issues such as its low birth rate, elevated debt levels and slower rate of urbanisation. The deleveraging process will need to continue and further fiscal and structural reform is needed if the authorities are to deal with fundamental imbalances in the economy.  

Global economy in rude health 

Despite the varied challenges, the global economy continues to be in rude health. The geopolitical outlook remains a significant risk, but commodity and supply-chain shocks in recent years have been manageable and relatively short-lived. 

While consumers have now used much of the excess savings built up during the pandemic, consumption should still be supported by a strong labour market, pay growth and lower interest rates. Policymakers will need to carefully navigate the path towards less restrictive policy levels, and progress is likely to be very data dependent. 

Overall, the picture of steady growth, disinflation and lower interest rates adds to the evidence that a ‘soft’ or even ‘no landing‘ scenario is playing out.