Global economic outlook: Charting different courses

The pandemic was a common, global shock for all economies that led to very synchronized outcomes. Nearly all economies experienced deep recessions and subsequent strong recoveries because of pent-up demand and policy stimulus. Associated with that, nearly all economies had unexpected surges in inflation, which resulted in aggressive rate hiking cycles.

As the world shifts further away from the pandemic shock, there starts to be a desynchronization and more variation in economic growth, inflation and monetary policy, said Rob Subbaraman, Nomura’s Head of Global Macro Research. There are many megatrends that are unfolding, such as artificial intelligence, geopolitical rifts, climate change, demographic change, elections in major economies and high and still-rising public debt, so it is important to be nimble and prepared to adjust world economic views as new data come in. This is, after all, a very dynamic and untested world, Subbaraman said, at a global economic outlook panel at Nomura Investor Forum Asia 2024 in Singapore.

United States

The US economy has performed better than other developed markets, particularly those in Europe. Most developed markets saw mild recessions or slow growth in late 2023 in the wake of the pandemic. Meanwhile, the US continues to grow at or above trend. As a result, the Federal Reserve is currently primarily focused on inflation and Nomura’s view is that the Fed is going to cut rates twice this year, in September and in December, said David Seif, the firm’s Chief Developed Markets Economist.

Inflation, after moderating in 2023, has reaccelerated in early 2024. It has since declined, and the Nomura view is that wage growth in the US is going to decelerate in the services sector. One thing that has kept inflation high is housing prices. We estimate that overall core inflation will come down enough for the Fed to justify an initial rate cut in September.

The upcoming presidential election also adds to the uncertainty about the US. It is a close call between the two frontrunners: former President Donald Trump, who has just been convicted of multiple felonies, and President Biden, who is trailing behind Trump in polls. As it is an electoral college election, the election will likely come down to three swing states: Wisconsin, Michigan and Pennsylvania. A very small bump would allow Biden to capture the presidency.

Europe

Unlike the US, GDP and consumer spending in Europe has been weaker compared with pre-pandemic levels, said George Buckley, Chief European Economist. Long-term economic growth expectations may be hampered by climate change, demographics, de-globalization, the pandemic shock, and the time required for technological advances to have any material impact. Brexit also had a sizeable impact in lowering UK economic growth expectations.

European central banks are likely to cut interest rates in the second half of the year, but stubborn domestic inflation remains a concern and could yet delay future policy easing. Services inflation continues to be persistent, reaching levels that make central banks cautious around cutting. Services inflation was initially caused by the pandemic and geopolitical conflicts, which led to an increase in goods prices and energy costs. This increase, which has seeped into services, is taking a long time to unwind because wage growth is still very strong. Elsewhere, euro area countries are tightening fiscal policy (and will be forced to cut back even further as the European Commission places some countries into excessive deficit procedures), while recent fiscal events have toned down the extent of fiscal tightening in UK.

Japan

The Bank of Japan is likely to hike interest rates in October as it waits to see wage hikes during the summer including those by SMEs and looks at economic recovery in the second quarter of 2024 and beyond, said Kyohei Morita, Chief Japan Economist.

Inflation in Japan, for which the central bank has set its target at 2%, is likely going to be stickier going forward. The BoJ is attempting to create this inflation rate domestically instead of importing it from overseas. A virtuous cycle between wages and prices that the central bank attaches significant importance to will come through if: 1) companies are able to pass through wage hikes to selling price of their goods and services; 2) increased consumer spending on the back of wage hikes can help companies increase their selling prices; 3) a rise in prices alters the wage-setting behavior of companies and leads to an increase in wages; and if inflation rises and real wages rise, then such inflation and wage hikes will more likely embed a virtuous cycle between them.

China

The Chinese economy has seen some major challenges. The pandemic in the country lasted longer than anywhere else in the world, which slowed down its recovery. But the biggest factor contributing to the slowdown in China has been its property market, which contributed 25% to GDP before its collapse. Several negative feedback loops exist – (i) if people don’t buy homes, home prices will decline, and if home prices decline, people don’t want to buy homes (ii) if developers fail to deliver homes, people don’t want to buy them, and if people are not willing to buy houses, it leaves developers with no capital to build houses (iii) if people don’t buy homes, developers don’t have the money to buy land, and local governments don’t have the money to pay their employees and the infrastructure they maintain.

Some new challenges are emerging in 2024. Chinese domestic consumption demand is tapering, and the government is trying to contain overcapacity in sectors such as solar, electric vehicles and batteries. The authorities are also trying to contain the growth of lower tier cities, which could lead to a fiscal cliff.

However, China is seeing some rebalancing this year, said Ting Lu, Chief China Economist. China’s exports have remained impressive, with deflation and weak domestic demand making export prices more competitive. The shift in expenditure from speculating on homes to actual consumption has also benefited the Chinese economy.

Lastly, Beijing’s own recent decisions relating to the property market marks the beginning of the end of the crisis in that sector. In the next two years, the Chinese government will have to spend trillions of yuan to complete 20 million units of homes delayed for delivery to its citizens. This guarantee of delivery is the most important step for the market to regain confidence. The stabilization of China will not only be a gain for the rest of Asia, but also for the rest of the world.

Asia

The export cycle in Asia, which has been in recovery for the last nine months, will continue to boost Asia’s growth outlook. Last year’s semiconductor-driven export recovery continues, and the region is now seeing the export recovery broaden out to include other sectors such as chemicals, ship building and autos. Alongside steady domestic demand, this should support overall growth in Asia.

Unlike the rest of the world, Asia did not face a massive inflation challenge after the pandemic. Yet, monetary policy will diverge within the region, said Sonal Varma, Chief Economist, India and Asia ex-Japan. Some central banks are more sensitive to the Fed policy than others, and some central banks have a hawk’s eye on financial stability. Broadly speaking, we expect rates on hold or a shallow easing cycle in the region. We expect rate cuts in India, South Korea and the Philippines; Malaysia and Thailand on hold; while risks are skewed towards a rate hike in Indonesia, if IDR comes under pressure.

We have three high-conviction views on Asia:

• India - The ruling party’s victory in the just-concluded elections indicates policy continuity, focus on capital expenditure and faster pace of fiscal consolidation which bodes well for medium-term growth and inflation.
• Indonesia - Our biggest concern is the medium-term fiscal outlook. Fiscal deficit may widen close to 3% of GDP next year on the back of populist policies of the incoming government.
• Thailand - Economic growth faces both cyclical and structural challenges. Monetary policy is restrictive, reflecting Bank of Thailand’s concerns around financial stability.

Asia is also undergoing some structural changes in terms of its trade with China. The region is importing more from but exporting less to China. We have also identified India, Vietnam and Malaysia as the new flying geese in Asia and as the main beneficiaries of the China-plus-one strategy.

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