Global Economic Outlook – May 2024

Reset for U.S. interest rate expectations and divergence with Fed ahead

“Inflation continues to dominate the global macroeconomic landscape. The stalled progress in easing prices and, in some cases, an acceleration of inflation have caused central bank monetary policymakers to reassure markets that inflation is still under control. The U.S. Federal Reserve has pushed rate cut expectations back to the second half of this year, while the European Central Bank (ECB) and the Bank of England (BoE) look likely to make the first rate cut move. However, we still expect North America to lead growth among developed economies, with potentially more support from Western Europe, and businesses in both regions to benefit from lower borrowing costs this year – though maybe later than originally expected. Meanwhile, policy uncertainty and the risk of geopolitical disruption continue to have the potential to affect decision-making.” – Dr. Arun Singh, Global Chief Economist, Dun & Bradstreet.

Global Economic Outlook

We began the year with a decent amount of optimism about the global economy’s prospects and although we’ve seen markets alter their expectations of developed economy interest rate decisions, we’ve also seen a continuation of more positive narratives, such as the general trend of disinflation and the clearing of some election uncertainty. Our overall view for global growth hasn’t changed a great deal. In some regions, such as Western Europe, we are starting to see tentative signs of the conditions for more durable growth starting to consolidate.

We still expect global growth this year to be broadly in line with last year, though we expect GDP slowdowns in North America and Latin America. The latest U.S. GDP data points to slower growth due to a softer outturn in consumer spending and weakness in net trade, and we expect growth to come in below the country’s pre-Covid long-term average annual growth rate. In May, the U.S. Federal Reserve signaled that rates would remain restrictive for longer, which will likely translate into weaker hiring and wage growth and further retrenchment of consumer spending. We will probably see softer growth in Latin America as well on the back of a deceleration in the Chinese Mainland and persistently high domestic interest rates. On the upside, the Asia Pacific region is likely to continue to benefit from global goods trade stabilization and continued strong intra-regional trade.

Though we have the first signs of an economic revival in Europe, with stronger growth in the eurozone’s largest economies in Q1, data heading into Q2 will confirm whether this is the beginning of a sustained rebound. The German and French economies both grew 0.2%, Italy’s by 0.3%, and Spain’s economy expanded 0.7%; together, these gains pushed the bloc back into positive territory following two quarters of contraction. Trending lower inflation across the single-currency bloc paves the way for the European Central Bank (ECB) to loosen monetary policy, potentially as early as Q2, setting up the conditions for a moderate recovery throughout the year. In April, the ECB said that its decision-making was “data-dependent, not Fed-dependent”, implying that eurozone interest rates may be lowered before comparable moves in the U.S. The U.K. appears to have exited a recession and the Bank of England (BoE) has also taken pains to distinguish between its decisions and those of the Fed, highlighting the differences in inflation in the two countries. However, both the ECB and BoE will be acutely aware that looser monetary policy could cause their domestic currencies to depreciate against the U.S. dollar, which would only add to inflationary pressure – precisely the effect they are trying to unwind.

The impact of the perception of a stronger U.S. economy and the Fed keeping interest rates higher for longer will not be lost on emerging economy central banks. A higher risk-free rate in the U.S. will weigh on the currencies of developing economies that borrow in dollars and make the extra risk attached to owning emerging economy assets seem relatively less attractive. However, some emerging economies, which moved ahead of developed economies to raise rates, now potentially have greater scope to begin and continue cutting interest rates, providing at least some insulation from the impact of current dollar strength. Ultimately, the continued pace and timing of policy loosening in emerging economies may be challenged by the timing of the Fed rate cuts, which have become increasingly indeterminate. We expect resilient emerging economy growth this year, led by the Asia Pacific region.

Inflation in many countries remains above central bank targets, but inflation trajectories and central bank reactions are more uncertain than they were at the start of the year. As a result, markets have once again moved to re-price interest rates. Market expectations have realigned around the consensus that the Fed will now not begin loosening monetary policy until Q3 or Q4 2024, and the prospect that the Fed may keep rates on hold for the duration of 2024 has increased. However, a wider and more diverse range of policy reactions has also emerged. At the extremes, options markets have priced in a one in five chance that the Fed will lower rates by 2 percentage points within the next 12 months, with a similar size bet that the Fed will increase rates within the next 12 months – almost unthinkable in January. For businesses, this uncertainty around expected and actual Fed behavior has implications far beyond the U.S., increasing policy uncertainty worldwide and making decision-making more challenging. A prolonged period of higher borrowing costs will test business solvency. However, so long as inflation remains under control, easier financial conditions should in time support businesses, notwithstanding the threat of further bankruptcies this year.

Geopolitical risks remain sharply in focus. International supply chain stress continues, not least in the Middle East, where in April the Houthis extended their attacks on shipping beyond the Red Sea and into the Indian Ocean.

Movement in Country Rating & Environment Risks

Note: Colors indicate Rating upgrade/Improvement in outlook, Rating downgrade/Deterioration in outlook

Movement in Dimensions

Source: Dun & Bradstreet.

Rating Changes

   (Upgrade)  

United Kingdom: Recent economic progress in the form of real GDP gains in January and February; moves to cut taxes for businesses and consumers; and falling inflation, which is making the start of interest rate cuts more imminent, mean we have upgraded the overall country risk rating.

United States: Though the economy slowed in Q1, growth remains relatively strong, and the jobs market continues to perform well. Inflation ticked up in the latest reading, but the broad trend is downward, allowing room for interest rate cuts in H2 2024.

Switzerland: The overall risk outlook has improved as swift moderation in inflation and robust services sector performance are giving the central bank elbow room for further rate cuts to stimulate growth. The manufacturing sector is showing signs of recovery. 

Latvia: The overall risk rating has been upgraded as the economy rebounds from a tough 2023, with expansion likely this year; sharp interest rate declines and prospects of EU rate cuts are expected to buoy business sentiment and consumer demand.

Kyrgyz Republic: We have upgraded the overall country risk rating due to strong economic growth supported by higher investment and funding; however, the country must tread a fine line between Russia and the West.

  (Downgrade)  

Finland: The economy is experiencing a recessionary spell, but recovery is anticipated in H2 once consumer spending improves, inflation moderates, and exports recover. We have downgraded the supply environment risk rating due to supply chain disruptions and the increased risk of cyberattacks. Rising bankruptcies and difficult market conditions in the property and manufacturing sectors have resulted in a downgrade of the market environment risk rating. 

Key Market Updates

United States: In Q1, GDP growth slowed, and further disinflation is expected; financial markets have come to a consensus that Fed cuts will not come until later this year.

Chinese Mainland: Trade relations between the Chinese Mainland and the West face new challenges, particularly concerning green energy and electric vehicles (EVs). The EU’s recent investigations into wind turbine subsidies mirror last year’s probe into EV subsidies from the Chinese Mainland.   

United Kingdom: Real GDP expansion in the first two months of the year mean that the U.K. economy likely exited recession in Q1. The government has removed VAT for 28,000 small businesses and plans to cut consumer taxes further in September.

Germany: Industrial production growth in January and February raises the chances that the German economic downturn is bottoming out; however, it seems premature to call the start of a strong rebound. The government has decided to invest in four major natural gas power plants as part of long-term energy security measures.

India: India’s growth outlook remains robust amidst external headwinds. Robust credit growth despite elevated interest rates, healthier bank balance sheets, modest current account deficit, along with resilient domestic demand are supporting the growth trajectory.

Japan: The Bank of Japan kept rates unchanged in April following its March rate hike, which should help keep a lid on inflation. Although higher borrowing costs will impact corporate liquidity and investment, economic risks remain evenly balanced.

Egypt: Egypt made a series of aid, loan, and investment agreements in March – worth over USD50bn –with multilateral financial institutions and neighbors, which should help the country withstand revived inflationary pressures after the recent currency devaluation. In December, President Abdel Fattah El-Sisi won a third term in office.

Israel: In March, Spain, Ireland, Slovenia, and Malta signed a declaration to recognize Palestinian statehood. Israel’s failure to address humanitarian concerns in Gaza risks alienating key allies.

Iran: At the start of May, it appears that Iran has chosen not to escalate following Israel's retaliatory attack on the central-western city of Isfahan. This attack followed Iran's drone and missile assault on Israel, which was, in turn, a response to Israel's bombing of the Iranian consulate in Syria. The imposition of fresh sanctions will have a negative impact on the economy.

United Arab Emirates: Iran’s recent involvement in the Israel-Hamas conflict poses risks to the UAE’s political and supply environments. An escalation of the conflict could threaten critical supply channels and the country’s security. We have also downgraded the business continuity risk rating, as the UAE has recently experienced intense flooding, exposing infrastructural vulnerabilities and lack of preparedness for climate-related emergencies.