China Investor Forum: The Global Economic Outlook

2024 has been and will be an interesting year for economic analysis and macroeconomic investment. In the US and Europe, central banks have already eased monetary policy. After many years of deflation and low inflation, Japan is on its way to normalizing monetary policy. In emerging markets, China is still managing its housing crisis, and India has been on the ascendency.

At our recent China Investor Forum in Shenzhen, our economists discussed their medium term global economic outlook.

United States

The US economy is at an inflection point: inflation is moderating, and we expect the current disinflation trend to continue, bringing inflation to the Fed’s 2% target in 2025. Cooling labor markets, driven by slower hiring as well as decreased churn, will likely lead to three rate cuts by the Fed this year – in September (already happened), November and December – followed by quarterly rate cuts in 2025. Due to these anticipated cuts, we believe the US economy will be able to avoid a recession. Overall, we see slow growth in the second half of the year but not negative growth or recession.

The US election in November could have a significant impact on the economy. Given the Republicans will likely take the majority of Senate seats, a Kamala Harris win would mean a divided government (i.e., the status quo). On the other hand, if Trump wins, Republicans could command a majority in both the Senate and the House of Representatives, leading to more tax cuts than otherwise. On the other hand, Trump would likely raise tariffs which, in turn, could push up inflation and have a negative impact on economic growth. Heightened uncertainty caused by his combative trade policy as well as higher tariffs would likely be negative on economic growth, outweighing the positive impact from tax cuts.

Euro area

The region has recovered quite well after a slowdown in the second half of 2023. However, we do see a few issues with that narrative. The first is that domestic demand has been weak and a lot of the growth rebound has been generated by trade. The UK and Germany have specifically remained the weakest in terms of recoveries made since before Covid-19, symptomatic of the problems that they are experiencing; for instance, Germany is highly exposed to manufacturing and China.

There has been an overall slowdown in the pace of expected long-term GDP growth across different global economies in the last 15-20 years. What does that mean for inflation? The inflation rate in Europe has moved closer to target. However, services inflation has been quite sticky, shown by recent numbers where they rose to 4.2% in Europe and fell to 5.2% in the UK, which are both too high for any central bank comfort. The Olympics generated some strength in European inflation recently, but we think it will continue to fall. Central banks are focusing on services inflation, as it has proven to be a good reflection of domestic demand and how it affects wages.

Employment is still growing in both Europe and the UK. Vacancies have fallen but they are still above where they were in the five years before the pandemic. The unemployment rate is at, or in some cases below, the equilibrium rate of employment, which has been instrumental in generating higher wage growth. That the labor market is still strong suggests it could continue to impart a positive impetus on inflation going forward.

In the euro area, the European Central Bank cut its deposit rate by 25 basis points in September. With monetary policy likely constraining growth, we look for further rate cuts from the ECB and Bank of England. For the ECB, we expect two further 25 basis points cuts this year and three in 2025, taking the deposit rate to 2.50% by September 2025. For the BoE, still-robust but slowing wage growth and sticky services inflation will we think limit it to cutting only once more this year in November and thereafter cutting once per quarter until the bank rate reaches 3.50% by February 2026. Markets are currently pricing in far more aggressive easing than we expect.

Japan

We forecast real GDP growth of -0.3% in 2024, which is much lower than the potential GDP growth rate of around 0.5%. This is due to the negative carryover effects from the previous year. If you were to look at the numbers on a quarterly basis, there could be modest growth going forward, led by domestic demand such as private consumption and capital expenditure. Both of these will likely continue to recover into 2025 and 2026.

We expect inflation in Japan to converge to around 2%, supported primarily by wage-driven inflation. Core CPI should stay around 2% year-on-year until 2026, which should be satisfactory enough for Bank of Japan to raise rates. Japan has entered a new era for wage inflation. The 2024 Shunto or spring wage negotiations resulted in strong wage hikes, implying a consumption recovery. We expect the Shunto result in 2025 to decelerate a little, but demographic factors may still sustain it at a relatively high level.

Japan has been facing population decline since 2008. Until recently, the population decline resulted in a shrinkage of demand, but now it has also started to affect labor supply. While it used to be a source of deflation, it is now instead becoming a key source of inflation. The BOJ is cognizant that this structural issue is leading to wage inflation, and has adopted a hawkish stance.

Overall, we expect the BOJ to hike its policy rate in December, followed by April and July 2025 by 25 basis points each.

Asia ex-Japan

2024 has been challenging for China. In spite of that, economic growth in Asia has held up thanks to the recovery in the tech cycle as well as steady domestic demand. From a cyclical perspective, some of the export pickup is also due to frontloading ahead of potential tariffs. In 2025, we are likely to see a moderation in exports from the region. Within the region, we are above consensus on GDP growth in Singapore and Malaysia, and below consensus for Thailand. We expect the outperformers in the region over the medium term to be India, Indonesia, the Philippines and Malaysia.

On inflation and monetary policy, many central banks in Asia are about to inflect into their rate cutting cycle. Inflation has eased to central bank targets for many economies, domestic demand needs support, and the upcoming rate cuts by the Fed are likely to be an additional trigger. The Philippines cut policy rates in August, and Indonesia cut in September. Meanwhile, India and Korea are expected to move ahead with their rate easing cycle in October.

From a medium-term perspective, Asia ex-Japan could attract substantial capital inflows, due to its solid fundamentals and growth drivers such as supply chain relocation, AI and infrastructure spending.

We also see some structural shifts in Asia’s trade relationship with China. Asia is exporting less to China, but importing more from it. This is due to the shifts in supply chains from China to the rest of the region, the weakness in China’s own demand leading to a substantial drop in Asia’s exports to China, and some of China’s overcapacity reaching Asian shores. In turn, this is resulting in challenges across some of the region’s emerging economies.