Global monetary policy easing should broaden later this year if, as we expect, sequential inflation moderates again. The moderation in US growth looks consistent with a “soft landing”, although both a “no landing” and a more severe slowdown are risks. Improving European growth means some convergence with the US. There are structural headwinds to Chinese growth, but policy easing should help meet the growth target this year. A Trump victory in the US presidential election in November could represent an inflationary shock to the global economy.

We think the re-emergence of inflation pressures over the first half of 2024, in the US and elsewhere, should soon give way to a resumption of moderating sequential inflation. Core services inflation has proved particularly sticky (see Chart 1). But leading indicators such as US rental prices suggest shelter inflation should ease. An underlying loosening in the labour market is likely to help slow wage growth. Falling used car prices suggest goods disinflation will resume. And the latest decline in oil prices will put downward pressure on inflation.

That said, the sharp drop in US inflation in the second half of last year means that base effects will turn increasingly unfavorable as the year progresses. So, even if sequential inflation moderates again, year-over-year rates may not make much downward progress.

Indeed, history provides plenty of reasons to worry about the “last mile” of disinflation. Second-round effects from higher inflation expectations could mean labor-intensive services inflation remains sticky. Moreover, geopolitics might re-ignite inflation pressures in a way central banks can’t look through. And in the long run, more supply-side shocks, including from geopolitics and climate, may structurally increase inflation volatility.

However, the recent moderation in US activity growth should also help to cool inflation pressures. Restrictive monetary policy, fading support from savings stocks, moderating non-residential structures investment, and a less supportive fiscal impulse are all reasons why growth is likely to cool further. Recent weak survey data highlight the downside risk that this slowdown morphs into an outright contraction. But for now, with employment growth still solid and our recession risk indicators low, we think this slowdown looks consistent with a soft landing.

Meanwhile, growth has recovered in the Eurozone and the UK amid positive real income growth and improving sentiment. We are forecasting an extended period of around-trend growth in these economies, implying a degree of convergence with the US. Headline inflation is heading back to target in both the Eurozone and UK, although better growth has contributed to stickier underlying inflation.

We are not yet changing our UK growth forecasts in light of the likely Labor election victory partly because there are fiscal and political constraints on supply-side reforms. But if Labor does achieve planning liberalization and a closer relationship with the EU, this could boost potential growth.

We expect the global monetary policy easing cycle to gradually broaden (see Chart 2). Having started its cutting cycle in June, the European Central Bank should lower rates twice more this year. We think the Bank of England will start cutting in August and by a total of three times this year. And we are forecasting Federal Reserve (Fed) rate cuts in September and December.

In each case, rate cuts would only dial down the degree of restrictiveness. And risks are very much skewed to later and fewer cuts. The bar is low for inflation or growth surprises to delay easing, but high to precipitate a return to rate hikes.

For next year, we are forecasting a roughly once-per- quarter pace of rate cuts in the US, Eurozone, and UK. The level of r* will help determine where rates settle in the long run. Demographics, inequality, and the relative cost of capital are still weighing on equilibrium interest rates. But AI and investment in the energy transition could push r* higher. Either way, the term premia component of bond yields may need to rise amid large deficits and more volatile inflation.

The Bank of Japan (BoJ) will remain an exception to global easing. Strong wage growth and pressure on the yen mean the BoJ is likely to hike rates further. But with the exit from the lost decades incomplete, tightening will be modest.

We expect the Chinese real estate sector to remain in structural retrenchment. Alongside subdued consumer confidence and little prospect of the savings stock being run down, this poses a material headwind to growth. Indeed, demographics and capital misallocation mean that trend growth may slow by 4% towards the end of the decade.

However, ongoing policy easing, including recent measures to put the property sector on firmer foundations, remains a support to growth. The GDP growth target of around 5% is likely to be met this year, and inflation has escaped negative territory. But concerns about derisking, and the need to reserve some dry powder in case of a trade war with the US, rule out ‘big bang’ easing.

We expect aggregate emerging market (EM) growth to retain momentum though 2024, amid resilient services and a pick-up in manufacturing and trade.

Headline inflation has returned to target in EMs, although sticky core services inflation is likely to remain a challenge, including in Emerging Europe and Mexico. We expect Asia- Pacific central banks to continue waiting for the start of Fed rate cuts before easing due to possible currency pressures. Better growth and sticky services inflation may slow the pace of rate cuts elsewhere. But we do expect the EM easing cycle to broaden out over time.

The US election in November is a key risk to the global outlook. A Biden second term, which is what we are conditioning our forecasts on at this stage, would represent broad policy continuity. However, the mix off tariff fiscal, regulatory and immigration policies that Trump may pursue in case of victory is highly uncertain and could result in a strong inflationary impulse.

Source: abrdn (June 2024)

IMPORTANT INFORMATION

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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