02 | Global economic outlook
Shock absorber: global economy to march steadily through a pivotal political year
⏱ 9 min read
While momentum continues across in-demand industries, structural economic challenges remain deeply rooted across the globe, placing a drag on growth.
Taken as a whole, the global economy is stable and improving, though it is a long way from booming. Several indicators point to a period of sluggish growth to come.
Despite this, there are reasons to be positive. The risk of a global recession has been skirted, with inflation easing, and commodity and energy prices softening. As a consequence, there is increased expectancy in global financial markets for cuts in interest rates to stimulate growth. However, this growth will be hard won – and slow to materialise.
High stakes in an election year
A sequence of overlapping risks is being held in the balance by policymakers.
2024 is set to see the greatest number of elections in global history, with swathes of the world’s population heading to the ballot boxes.
Recent geopolitical instability, rising tensions and potential moves towards more isolationist, de-globalising policies to win votes may affect the global economic picture.
This illustrates a complex and unpredictable economic outlook, which many commentators expect to remain subdued for the rest of this decade.
However, as the past 12 months have demonstrated, expectations may well be exceeded, with the world economy showing remarkable resilience through continued shocks.
Global forecasts paint a mixed picture
Overall gross domestic product (GDP) has held up better than anticipated, growing by 3.5 percent in 2022 and 3.2 percent in 2023, an outperformance compared with the IMF’s forecast of 2.7 percent for 2023.
While high interest rates were expected to dramatically pinch household budgets and constrain spending in developed markets, savings accumulated during the pandemic have so far provided a buffer to stave off recessionary pressures in many markets.
However, tight monetary policies to counter inflation, the removal of fiscal support and low productivity in several major economies could put the brakes on growth in the short and medium term.
Increased propensity to use tariffs and subsidies to safeguard domestic interests could continue as many hit the election campaign trail, further fragmenting global trade and exacerbating geopolitical tensions which arise as a result.
Forecasts for several of the G20’s emerging economies have been revised down and will weigh on the global economy.
India, spurred on by one of the world’s youngest populations, is now expected to deliver 6.8 percent GDP growth in 2024 – the highest in the G20, but a percentage point lower than in 2023.
China’s ambitious growth agenda is being hampered by a downturn in its real estate sector, on which the national economy is heavily reliant, and the forecast is for growth to slow from 5.2 percent in 2023 to 4.6 percent in 2024.
There is general consensus in the forecasts published by both the IMF and the Organisation for Economic Co-operation and Development (OECD). The emerging economies of India, Indonesia, China, Turkey and Russia are all expected to be the strongest performers, continuing the trend of the past two decades.
The weakest emerging economies are expected to be Argentina, where we could see radical policies to stem its inflationary spiral and economic decline, and South Africa, where citizens have headed to the polls for the most important election in 30 years. South Africa’s economic outlook is being undermined by high unemployment, continued electricity shortages and high public debt levels.
Turning to the developed economies, Germany is expected to show the weakest performance among the eurozone, as elevated energy costs, decreased foreign investment and record high interest rates take their toll. However, some indicators now point to the business outlook steadily improving.
Spain is forecast to outperform other EU nations with 1.9 percent growth forecasted. Its economy has been bolstered by the return to pre-pandemic levels of tourism and waves of financial investment in recent years from the EU Recovery Fund.
Source: International Monetary Fund (IMF)
Inflation rates offering respite
While still above target levels, headline inflation has been falling from the peaks seen in 2022. Globally, the inflation rate sat at 6.8 percent in 2023, and is on track to fall to 5.9 percent in 2024 and further to 4.5 percent in 2025, according to IMF data.
The overall easing of inflation is being aided by shipping and commodity prices continuing to settle following the disruption of the pandemic. As a result of softened demand and supply chain bottlenecks easing, prices of key metals have dropped over the past year. The World Bank has reported reductions of 14.5 percent in the cost of iron ore, 25.1 percent for nickel and 17.1 percent for zinc, with these expected to fall further through 2024.
Greater certainty around energy supplies and the impact of tight monetary policy on global demand have also been pushing costs downwards. The average price of oil has fallen by 28.5 percent since its peak in June 2022 as production in the US and Iran has swelled.
Freight costs have seen a dramatic decrease of 75 percent since January 2022, but are still 79 percent above their pre-pandemic levels.
In Europe, where reliance on Russian oil and gas caused prices to soar in 2022 with the outbreak of the war in Ukraine, markets have shifted to imports from the US and northern Africa, allowing the region to shore up reserves and stabilise prices.
Source: The World Bank
Figure 3: Oil, natural gas and coal prices
Source: The World Bank
With inflation continuing to ease this year, there will be increased calls for central banks to start cutting interest rates. However, a sense of caution is to be expected as monetary policymakers and governments walk a careful line between encouraging growth and keeping a handle on inflation. As a result, we may not see rate cuts in some major markets until the tail end of 2024 or early 2025.
As US rates remain high for longer, this will cause acute challenges for emerging markets with large dollar denominated debts and could make it more difficult for other central banks to lower their own rates. That said, the expectation is for rates to start to ease from mid-2024 into 2025 as banks work to spur on fresh investment.
The interest rate outlook for emerging economies is not as dovish as it is for developed countries. In both Brazil and Mexico, rates are expected to be close to 10 percent at the end of 2024, and in India, only a moderate fall is expected from the 6.5 percent peak to 5.75 percent. The need to control inflation is still the main policy objective.
Figure 4: Developed and emerging economies interest rate and forecast
Source: Organisation for Economic Co-operation and Development (OECD)
Hurdles remain for price deflation
Geopolitical tensions, particularly the possibility of an escalation of the conflict in the Middle East, could spell further trouble for inflation and interest rate forecasts.
The cost of mechanical and electrical components in Europe, for example, has picked up due to the redirection of shipping routes by Far East suppliers, which dominate production of electronics, around the Cape of Good Hope to avoid the Red Sea. At the start of the Red Sea crisis, there was an upside risk to inflation from renewed goods delays and higher shipping costs. However, so far, we have not seen this materialise.
Shortages of skilled labour are providing another barrier to unpicking stubborn inflation. Unemployment rates in the G7 economies are at historical lows, in part as a result of early retirement decisions and career moves triggered during the pandemic. While low unemployment rates should support demand and protect economies from risks of outright recessions, it is also pushing wage costs upwards, adding to persistent inflationary pressures.
Source: Organisation for Economic Co-operation and Development (OECD)
The balance between labour supply and demand is beginning to shift for several reasons. Recruitment challenges are limiting businesses’ appetite for lay-offs, while a soft outlook for growth has eroded the volume of unfilled vacancies in the job market.
Meanwhile, emerging markets are also benefitting from strong population growth and increasingly young workforces.
Although the US, Canada, UK and the Euro area have recorded an increase in foreign migrant workers since the pandemic, labour participation rates in North America have been mostly flat for the past year, falling in the UK and with a modest rise in the Euro area.
General elections taking place in a number of major markets this year, the US most notably, throw up considerable uncertainties around future immigration policies, which could impact the supply of skills and contribute to a heating labour market once more. Political uncertainties are also likely to introduce renewed volatility in the currency and commodity markets and could reignite inflationary pressures.
New catalysts for investment
There are green shoots of recovery appearing across global regions, particularly in the revival of industrial manufacturing, which is proving an important catalyst for investment and productivity.
In the US, subsidies through the Inflation Reduction Act are supporting the advancement of green technologies, particularly battery manufacturing – working to challenge China’s current dominance in this area. Similarly, the Biden administration’s Chips and Science Act is spurring on the development of the country’s domestic manufacturing sector.
Advanced manufacturing continues to boom across its traditional heartlands in Asia. Europe is also accelerating its investment with the EU’s Net Zero Industry Act.
AI could help break out of the post-2008 cycle of diminishing returns from technological progress and slow adoption of new digital technologies into production processes. But this comes at the potential cost of job displacement and increased inequality – making AI both an opportunity and challenge in equal measure.
Artificial Intelligence (AI) holds the potential to raise worker productivity and incomes, contributing to growth over the medium term.
Climate change to define long-term growth prospects
Climate change will be the defining long-term challenge facing the global economy. According to the World Economic Forum, the global economy could lose ten percent of its total economic value by 2050 as a result of climate change.
However, a growing list of countries, cities, businesses and other institutions have pledged to meet net-zero emissions. More than 140 countries have set these targets, covering about 88 percent of global emissions, by at least 2050.
There is already a significant drive to develop renewable energy sources from solar power, wind farms and hydro and to move away from carbon energy generation. This will require a significant amount of infrastructure investment, at a time when interest rates are expected to remain high.
Looking beyond interest rates to spur on growth
There are reasons to be optimistic about the outlook, with inflation expected to fall across the globe this year, energy and commodity costs easing and the expectation of lower interest rates.
Healthy investment is continuing in key sectors on a global scale, such as in industrial manufacturing, data centres, healthcare and life sciences, which will help to keep the wheels of growth turning.
Yet the economy remains on an unsure footing and growth is likely to remain subdued. Banks may be slow in reducing interest rates, particularly in the US, which will have knock-on impacts for investment across the world.
Climate change mitigation policies are expected to drive infrastructure investment in renewable energy, as well as opportunities for domestic and commercial heat pumps and production of electric vehicle batteries. In real estate, there is already a shift in demand for sustainable buildings and this is expected to grow over the decade to come.
For clients looking to reset their capital investment strategies against this backdrop, the next 12 months should offer an increasingly stable environment economically with key opportunities developing in vibrant sectors, green investment areas and emerging economies.
Regardless of when rates ease or by how much, policymakers will need to place a sharp focus on improving productivity and maintaining free-flowing global trade to reap the rewards of greater fiscal headroom and restart the engine of growth.
