April 23, 2024
World Economy

Global economic outlook: Growth prospects brighten, inflation outlook more cloudy

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economic data and forecasts

Our annual global real GDP forecast for 2024 has been
revised up from 2.3% to 2.5%.
This primarily reflects a
significant upward revision to our US forecast, related to
unexpectedly strong growth in the final quarter of 2023. Some of
that strength is also expected to persist in early 2024. The 2024
growth forecasts for Canada, the eurozone, the UK and Russia have
also been revised higher in February’s update, although to a lesser
extent. Western Europe’s growth underperformance is likely to
persist in the near term. Our global growth forecast remains
somewhat higher than market consensus expectations, supported by
positive signals in our Purchasing Managers’ Index (PMI™) data.

Global PMI data continues to point to a gradual
improvement in economic conditions.
The JPMorgan Global
Composite PMI output index compiled by S&P Global improved for
the third month in a row in January, reaching its highest level for
seven months. Forward-looking aspects of the survey were also
indicative of further improvements ahead, with new orders and
future output expectations rising to their highest levels since
mid-2023. Improving confidence in demand prospects was also reflected
in a pick-up in employment. Looser financial conditions are helping
to stimulate activity in services. While manufacturing conditions
remain relatively challenging, in the eurozone particularly,
progress in reducing inventories is providing some support.

Core inflation rates have continued to fall but the
outlook is more uncertain owing to shipping disruptions.

While headline global consumer price (CPI) inflation edged up in
December 2023, according to our estimates, the core rate declined
for the ninth straight month. Global core goods CPI inflation
dropped to just 1.3% in December 2023, according to our estimates,
7 percentage points below the early 2022 peak. PMI data has started
to show some effects from disruptions to shipping routes, including
a lengthening of suppliers’ delivery times in January for the first
time in a year. Still, manufacturing price indices remained
relatively stable, and the Material Price Index (MPI) compiled by
Market Intelligence saw a sharp fall in mid-February, with weakness
broad-based. Consistent with various related indicators and rules
of thumb, the inflationary effects of the shipping disruptions do
not appear to be large enough to materially alter the outlook. We
will continue to monitor the upside risks. Global CPI inflation for
services remains relatively sticky, edging down to 4.6% in December
2023, and we continue to expect a gradual moderation.

Financial market expectations of policy rate cuts in
2024 now look more realistic.
At the peak in December
2023, cumulative rate cuts of over 160 basis points by the US
Federal Reserve and European Central Bank were priced into futures
markets for 2024. Those expectations have been pared back to around
90 and 110 basis points of cuts, respectively, at the time of
writing. These are more realistic expectations and broadly match
our forecasts of 100 basis points of cuts from both central banks
this year. Market expectations of the timing of initial cuts have
also been pushed back, with 25-basis-point cuts from the Fed and
ECB now only fully priced by June’s meetings. Market Intelligence’s
forecasts in our February update assume an initial Fed cut in May,
with the ECB to follow in June. The scaling back of market
expectations for Bank of England rate cuts has left the 70 basis
points of cuts priced in for 2024 arguably looking a little
conservative; we forecast 100 basis points. An initial
25-basis-point cut is now fully priced only by August’s meeting,
one meeting later than our June call.

The back-up in long-term interest rates has continued,
supporting the US dollar.
The 10-year Treasury yield
reached 4.3% in mid-February, over 50 basis points above its low in
late 2023. Yields in other markets have also backed up, although to
a lesser extent. While our economic and monetary policy projections
remain consistent with a declining trend in sovereign bond yields
during 2024, we have lifted our near-term forecasts. The
combination of upward surprises from US economic data, shifting Fed
policy expectations, and sharply rising Treasury yields has seen
the US dollar rebound against some key cross rates. We continue to
forecast a depreciating trend in the dollar this year on a
trade-weighted basis, reflecting its still elevated level and
various fundamental drivers, including an expected narrowing of
yield differentials. However, we have adjusted some of our
near-term currency forecasts. This includes a weaker yen, given
recent falls below 150 versus the US dollar, the Japanese economy
in recession and the Bank of Japan’s path to policy tightening
being less clear-cut.

Discover our top 10 economic
predictions for 2024

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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