Global economy resilient in the face of headwinds

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

Key points

• Despite elevated geopolitical tensions, elections and postponed rate cuts, the global economy is expected to remain resilient in the months ahead. 
• The US is showing signs of slowing, with consumers running out of steam, unemployment on the rise and stickier inflation than expected. However, economic expansion this year and next should still be ahead of most peers.
• Turning to the eurozone and UK, both economies have escaped from recession this year as an upturn takes more hold. However, expansion this year and next will be challenging and is set to be below its historical trend rate. 
• Finally, in China the long-awaited economic rebirth is underway. However, with a persisting slump in the property market and weaker labour market, progress is likely to be fragile. That said, we expect the country to hit its growth target in 2024.

Six months into 2024 and much has changed in the world but our assessment of the global economy has barely budged. Over the rest of the year, weaker growth, softer inflation and so lower interest rates all appear to be on the cards. 

At the margin, there seem to be some mild positives for the outlook in China though more caution about the US growth profile. While out of recession, the eurozone and UK economies will likely remain subdued in the coming quarters. 

However, geopolitical risk is to the fore, with electorates in the US, eurozone, India and UK having just been to the polls or due to go. The potential impact of the elections could have profound consequences. So, where does that leave the global economy?  

Inflation outlook 

A mixture of base effects, easing energy prices, restrictive monetary policy and fewer supply-side restrictions has helped to curb price pressures. However, recent falls in the consumer price index (CPI) have proved to be more ‘sticky’ than many economists had anticipated. 

We forecast that global consumer prices will rise by 2.6% this year, and 2.4% in 2025 (see table). The slower decline in CPI is likely to influence the pace of monetary policy shifts, with interest rates likely to stay higher for longer in several key regions. 

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

Geopolitical risk 

Financial markets face a particularly precarious six months in terms of geopolitical events. However, the extent to which they might influence sentiment and growth remains to be seen. Ukrainian and Middle Eastern conflicts continue to impact commodity markets and global supply chains. Growth-sapping trade tariffs are also re-emerging. 

This year is a seminal political period. Following elections in India and across the European Union, and with countries like the US and UK to follow, nearly half the world’s population is set to vote. This could have profound implications for global stability, international diplomacy and economic policy. 

With the backdrop of so much uncertainty, policymakers face a difficult period. The conflicting forces of dovish monetary policy versus a more constrained fiscal backdrop, particularly in the United States, will muddy the policy trajectory.  

After years of economic support through the financial crisis, the pandemic and the energy crisis, government coffers are now exhausted and future provisions are likely to limited. Meanwhile, lower interest rates should be supportive of economic activity, but will not be enough to boost the growth outlook quickly. 

The end of the US exceptionalism?

The world’s biggest economy appears to be slowing, after a strong 2023. Several indicators suggest the speed bumps seen in the first five months may be no accident. Indeed, the US consumer seems to have exhausted the excess savings accumulated during the COVID-19 pandemic, when the government doled out support, while the job market has softened. 

In addition, the US consumer may be running on fumes. We forecast that domestic private consumption growth will slow over the next 18 months, from 2.5% in 2024 to 1.6% in 2025. Meanwhile, US unemployment is likely to climb, but could peak at 4%, which still remains low by historical standards.  

Despite more signs of US inflation moderating this year, price pressures remain elevated, specifically in the services sector. We expect CPI to remain above the 2% targeted level over the next 18 months, reaching 3.1% in December and 2.3% by the end of 2025 (see table). 

Concerns that it will take longer for inflation to sustainably return to the central bank’s 2% target has supported a postponement of the start of the rate-cutting cycle. Disappointing investors along the way. We now expect the US Federal Reserve (Fed) to cut rates by just a quarter point this year, meaning the federal funds target range will be at 5-5.25% at year end. However, a larger, one point reduction in rates is expected in 2025. 

For all the above concerns, anticipated US growth of 2.5% this year and 1.6% next would still be better than most of its developed peers. 

Inevitably, the upcoming presidential election makes forecasting even harder than usual. Our outlook is based on our perception of the US economy, and its momentum at this point in time.  

However, the next US president could introduce legislation that changes the path for growth, inflation and interest rates. Rather than getting caught in largely irrelevant guesswork, our focus is on identifying the areas of the US economy,  that are likely to be most immune from political gyrations. 

Europe on the mend? 

The eurozone appears to be accelerating from a precarious starting point: a technical recession – or at least a long period of stagnation. The bloc’s composite purchasing mangers’ index (PMI) hit 52.3 in May, helped by a recovery in manufacturing and expanding services sector. Meanwhile, the unemployment rate continues to hover around its historical low level of 6.5%. 

European price pressures have significantly eased over the past year. Although, headline inflation in May ticked up to 2.6% year on year (y/y), compared to 2.4% April. Meanwhile, core CPI, which excludes volatile items like energy and food, rose to 2.9% y/y. Further disinflation seems likely in coming months. The mixture of soft core goods inflation and lower energy prices has prompted us to trim our headline inflation projection. It now stands at an average of 2.3% in 2024 and 2.1% in 2025.

In turn, lower inflation should pave the way for interest rate cuts. After starting the rate-cutting cycle in June, we expect further quarter-point cuts in September and December assuming price rises ease. In addition, more cuts are anticipated next year, with the deposit rate potentially finishing 2025 at 2.5%. 

Despite the positive progress seen so far, gross domestic product (GDP) growth is likely to remain tepid and the anticipated easing in European Central Bank policy shouldn’t be seen as a sign of economic strength.  

The UK at a turning point?

Like the eurozone, the UK economy seems to be finding a second wind. The country returned to growth in the first three months of the year. Activity rebounded with the fastest spurt in quarterly growth since 2021. This was driven by strong demand for services and a recovering manufacturing sector. After a downturn last year, consumers were back in spending mood, as wages growth outpaced inflation.  

As elsewhere, after a period of exceptional strength, the UK labour market has finally started to weaken. The unemployment rate rose to 4.3% in the three months to the end of March, compared to a 3.5% low recorded in August 2022. We forecast that the jobless rate will peak at 4.6% by the turn of the year. This may not bode well for domestic consumption levels, but should result in lower levels of pay growth, which in turn should help to ease the UK’s inflation profile. 

Turning to UK inflation, the headline rate eased to 2.3% in April, with core CPI hitting 3.9%, with the deceleration weaker than anticipated. While progress towards the 2% targeted level may take longer than expected, the slowdown should prove to be comforting enough for policymakers to start cutting rates this year and into next. We forecast that inflation will average 2.6% this year and be bang on target at 2% in 2025.

Lacklustre levels of growth, rising unemployment and inflation that’s close to the 2% target should give the Bank of England plenty of scope to consider cutting interest rates, despite the political uncertainty over the result of July’s election. The Monetary Policy Committee is expected to cut in August, November and December this year, with three further cuts in 2025, so taking the Bank Rate to 3.75% by August 2025.  

Economic activity levels are expected to remain below potential, with growth of 0.8% forecast for this year and 1% in 2025. Whatever the result of the election, the new administration’s room for manoeuvre will be constrained by having limited fiscal headroom.  

Can China defy the gloom?

The economy has seen signs of revival this year, but the recovery remains mixed and structural issues continue to weigh on the outlook. The 5.3% growth witnessed in the first quarter was better than expected. However, more recent data suggests that momentum has already slowed.

On the positive side, stronger global demand has fuelled a revival in industrial production and exports. Exports returned to growth in April with industrial production advancing 6.7% y/y, from 4.5% in March. 

In contrast, the key drivers of retail sales, the housing market and infrastructure investment, continue to act as a drag. Retail sales grew by 2.3% in April due to weaker discretionary goods sales and a contraction in car sales. Consumer demand remains under pressure, with softer wealth dynamics and a weaker labour market. Meanwhile, the real estate sector continues to be a cause for concern, with property investment slumping by 10.5% in April and house prices still heading lower.  

The Chinese authorities have embarked on a series of supportive polices, particularly for the ailing housing market. More innovative solutions may still be needed to stop the sector being a brake on economic expansion and for social stability. Given the positive start to the year, China seems to be on course to achieve its 5% growth target for 2024. However, weaker domestic consumption, a softer labour market and tumbling property investment hints at a fragile recovery. 

A resilient year ahead 

Considering the plethora of challenges that face the global economy, forecast expansion of 3.1% this year, and around 3.0% in 2025, would be encouraging. Our focus in the second half of the year is on the resilience of the recovery, progress with slowing price rises and the speed of rate cuts. 

If inflation measures return to targeted levels and central banks reduce borrowing costs, this should be another positive. However, the ongoing geopolitical tensions, reduced consumer firepower and fiscal restraints are likely to constrain the speed of the recovery for some time.