Economic and financial risk insights: global divergence continues with major upgrade to US outlook
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Key takeaways
- The US ended 2023 strongly, leading to a significant growth upgrade; Europe narrowly avoided recession and faces stagnation this year.
- Inflation is on a path back to target in 2024 in Europe and in 2025 in the US.
- Central banks are still expected to begin rate cuts in 2Q-2024, with the ECB and BoE the first from advanced economies.
We significantly upgrade our US real GDP growth forecast to 2.2% for 2024 (+1.1ppts vs our prior forecast) after a strong end to 2023 and ongoing resilience in the labour market. Still, we see 2024 sequential quarterly growth weaker than 2023 (see Figure 1). Our 2024 US GDP projection decomposed shows a strong carry-over effect of 1.3% from 2023 growth and growth momentum in 2024 of only 0.9%. We expect US resilience to fade as the labour market shows signs of softening in the coming months.
Figure 1. US and euro area historical and forecast quarterly GDP growth rates
The euro area narrowly avoided a technical recession in H2 2023 and we keep our forecast unchanged for stagnation in 2024. We nudge up our 2024 real growth forecast in China to 4.7% (+0.2ppts), anticipating greater policy support given a stronger pro-growth stance. Still, China's economic outlook remains muted, with the real estate sector still a major drag (see Figure 2).
Figure 2. Chinese property sales and real estate investment
Inflation set to reach 2% target in Europe in 2024 and in the US in 2025. We expect euro area CPI inflation to average 2.3% (-0.4ppts vs prior forecast), including temporarily dipping below 2% this year as large falls in energy prices contribute to more rapid disinflation than previously expected. Still, we anticipate a bumpy disinflation path as government interventions in prices roll off or are adjusted. In the US, core personal consumption expenditure (PCE) inflation, the Fed's preferred measure of inflation, has already slowed to the Fed's 2% target. Core PCE inflation is expected to weaken further this year (see Figure 3).
Figure 3. US headline and core PCE inflation
Upside risks to inflation stem from potentially higher-than-expected wage growth, mainly in Europe, and Red Sea shipping disruptions (see Figure 4). We nudge down our Japan CPI inflation forecast to 2.4% (-0.3ppt).
Figure 4. Prices for selected global shipping routes
Interest rate focus is on Fed, ECB and BoE rate cuts from Q2 onward given the progress on disinflation (see Figure 5). In the US, the economic strength and upside inflation risks mean we maintain our baseline of a cautious easing cycle, with a total of 75bps of policy rate cuts to end 2024 at 4.63%. We leave our US 10-year Treasury yield forecasts unchanged too. We see the ECB and BoE likely cutting from April and May respectively, after crucial wage data is released. We lower our year-end 2024 policy rate forecasts to 3% for the euro area (refi rate) and 3.75% for the UK.
Figure 5. Central bank policy rates and SRI projections
Expectations for weak growth and lower inflation in Europe also lead us to slightly reduce our euro 10-year sovereign yield forecasts for year-end 2024 (-0.4ppt) and 2025 (-0.6ppt). In Japan, we adjust yields for year-end 2024 (-0.1ppt) and 2025 (+0.1ppt).
Baseline view
We forecast a de-synchronised global growth slowdown, further bumpy disinflation and market volatility driven by uncertainty over timing of interest rate cuts this year.
Table 1. Key economic forecasts