Soft landing, solidly turning economy and steady interest rate cut
What more do investors want?
By David Rees, Senior Emerging Markets Economist, George Brown, Senior US Economist, and Tina Fong, Strategist, at Schroders
Unveiling their latest forecasts, Schroders’ economists explain why fears around an imminent US recession are overblown and project that central bank policymakers will cut rates cautiously to avoid a second wave of inflation.
Our forecast for the global economy is broadly unchanged. We now expect global growth to come in at 2.7% for both 2024 and 2025, marginally lower than the 2.8% we previously assumed. Meanwhile, inflation is still expected to be 3.1% in 2024, before falling back to 2.5% in 2025, a touch higher than our prior 2.4% forecast.
US recession fears overblown
From our perspective, concerns about an imminent US recession are overblown. Rising unemployment has not been driven by layoffs, but rather elevated inward net migration outpacing the normalisation in job creation. More broadly, labour market conditions have moved into better balance, which ought to see hiring and wage growth revert to a more typical pace.
Taken alongside further disinflation and improving credit availability, this should serve to sustain solid household consumption and, by extension, economic activity more generally.
UK to outpace eurozone growth
The eurozone economy is being held back by the manufacturing malaise. Factory output continues to lag far behind consumer-facing sectors despite the upturn in the global goods cycle. With manufacturers faring better elsewhere, this might point to a structural loss of competitiveness, leading us to scale back our eurozone growth forecast for next year.
By contrast, we have become slightly more constructive on the outlook for the UK, such that we now expect it to outpace the eurozone both this year and next. However, disruptions to the supply side of the economy in recent years suggest that faster growth will ensure inflation pressures linger.
China set to miss growth target
China now looks set to fall short of its 5% growth target this year. Soft domestic demand has outweighed a solid export performance, with the housing crisis remaining a significant drag on confidence and investment. So far, Beijing has been reluctant to deliver much fiscal easing. It could be that the authorities are keeping their powder dry for 2025 when fading export growth and the outcome of the US election could force their hand.
Slow and steady rate cuts
Central banks are unlikely to deliver the easing priced into markets. Policymakers are set to cut rates cautiously to avoid a second wave of inflation. Our forecast still sees the Federal Reserve (Fed) lowering rates at a quarterly pace from September, albeit with one additional cut in 2025 given the downside surprise in core inflation. And tweaks to our rate profiles for the European Central Bank and Bank of England mean both deliver one fewer rate cut by end-2025 than we previously expected.
However, Fed chair Powell’s remarks at Jackson Hole were clearly dovish. This has raised the risk that the Fed opts for a more aggressive pace of easing than we expect. It has also seen the greenback lose ground, with the dollar index down around 3.5% since the start of August. Fundamentals point to dollar depreciation in the medium term, but an unwinding of market pricing for aggressive rate cuts is likely to lend some support to the currency in the near-term.
Differing US election outcomes
There are bimodal outcomes to the US election. Harris is the slight favourite in betting markets, with an implied 50.5% likelihood of victory. In our view, Trump and Harris stand an equal chance of winning, but for the forecast we assume betting markets are correct. From an economic perspective, this should have a negligible impact given a Harris presidency would likely be with a divided Congress. But if Trump were to win instead, it would have a reflationary impact given his deregulatory, neo‑mercantilist and anti-immigration policies.
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