Global Economic Outlook: A slow-then-grow recovery

As the countdown to a new year began, the world’s major central banks gave the global economy reason to party. Nearly two years of relentless monetary policy tightening appear to have done the trick. To be sure, high prices continue to hurt businesses and consumers around the world. But the pace of those increases has moved convincingly toward a threshold deemed acceptable by central bankers.

What’s more, a series of one-off events, easing supply chains and a resilient U.S. consumer have mitigated the damage of higher interest rates on the labour market, increasing hopes for that ever-elusive soft landing. And so, in what marks a significant milestone for the economy’s post-pandemic recovery, the balance now shifts to ensuring that the treatment doesn’t cause more pain than what ails the system.

While financial markets have popped the cork on the new year policy pivot party, anticipating stronger asset pricing as rates ease from currently restrictive levels, the celebration may be slightly premature when it comes to the real economy. In our latest Global Economic Outlook, we expect central banks to cut rates, with a gaze firmly fixed on inflationary trends. The Bank of Canada, the U.S. Federal Reserve, and the European Central Bank will begin cutting this year, but it’ll take them well into 2025 to get policy rates to their neutral levels—the point at which rates neither help nor harm economic activity. 

In the U.S., consumers will continue to spend, albeit at a slower pace, as excess savings are finally exhausted by higher prices and interest rates, and pent-up demand runs its course. Higher costs are also constraining businesses’ ability to spend, meaning that the pace of job gains and wage increases will continue to ease. A weaker consumer coupled with slower global growth will soften the U.S. outlook for 2024, generating growth of just 1.2%. We expect activity to bounce back in the second half of the year, bringing growth closer to trend in 2025, at 1.8%.

Canada’s economy is also expected to see below-trend growth in the first half of the year. In the third-quarter, Canadian households spent more than 15% of disposable income on debt payments, as interest rate increases hit home. At the same time, the labour market was showing signs of weakness. This increases the chance that the Bank of Canada will cut rates earlier than the Fed, putting some pressure on the Canadian dollar, which we expect to average US$0.74 in 2024 and US$0.78 in 2025.

Germany has only managed to post growth in three of the last eight quarters, as weak Chinese growth and the loss of cheap Russian energy continue to weigh on industrial production in Europe’s largest economy. Notwithstanding the positive impacts of increased tourism, resulting from the 2024 Olympics in Paris, German weakness will cause the Euro Area to achieve only meagre growth of just 0.8% in 2024 and 1.4% in 2025.

China, meanwhile, continues to deal with the lingering effects of its property slowdown, lacklustre business and consumer confidence, record youth unemployment and weak external demand. While the government has undertaken some stimulus measures and the central bank has eased financial conditions, we anticipate that the current policy response won’t be enough to buoy the outlook. Instead, we forecast Chinese growth of just 4.6% in 2024 and 4.4% in 2025, as the economy processes these challenges, and the regime tries to pivot toward a more self-sufficient, consumption-driven economy, rather than one fuelled by credit and real estate.

The bottom line?

Overall, the global economy will expand by just 2.8% in 2024, before generating more robust growth of 3.3% in 2025—a pace more in line with pre-pandemic levels. The weaker global outlook and subdued demand in the early part of our forecast will weigh on commodities. We forecast oil and copper prices to fall back modestly in 2024. Copper will benefit from renewed activity in 2025, while the oil market continues to adjust to new structural realities. Gold prices, meanwhile, will be supported in 2024 by worldwide election uncertainty and ongoing geopolitical volatility which, together with renewed supply chain disruptions, remain key risks to watch out for over the horizon.

This week, special thanks to Ross Prusakowski, director of our Country & Sector Intelligence team.

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