Global economic outlook: The path to policy pivots

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The improving news on inflation is paving the way for monetary policy pivots over the coming months. While financial markets had gotten a bit carried away at the end of last year, and expectations have rightly been pared back recently, the conditions required for rate cuts to begin are closer at hand.

Global consumer price inflation forecasts for 2024-25 have been slightly reduced. We expect the downward trend to continue at a more gradual pace given diminishing base effects. Our forecasts for annual global consumer price inflation in 2024 and 2025 edged down to 4.6% and 3.1%, respectively, versus an expected 5.6% average in 2023. While the recent disruptions to shipping in the Red Sea could slow the expected moderation in core goods inflation, crude oil prices remain well below the September 2023 peaks. Purchasing Managers' Index™ (PMI™) data compiled by S&P Global have also continued to show a moderation in service sector input prices.

An early monetary policy pivot in the US is now our base case. We have revised down our forecast of US core Personal Consumption Expenditure (PCE) inflation for 2024 overall. This, along with the revelation that the Federal Reserve (Fed) discussed rate cuts in 2024 at the December 2023 policy meeting, has led us to bring forward our forecast of the first Fed rate cut to March from June. Four 25-basis-point cuts are forecast over the year in total.

Rate cuts are still forecast to begin somewhat later in Western Europe. We continue to expect the European Central Bank (ECB) to begin cutting rates in the first half of 2024, consistent with continued weakness in economic activity and improving signs from inflation data. Our base case remains for an initial 25-basis-point cut in June, with 100 basis points of cuts forecast overall during 2024. A slightly earlier start to the easing cycle is feasible should activity data disappoint and inflation surprise to the downside. Broadly the same applies to the Bank of England, with an initial cut in policy rates forecast only in August, given ongoing concerns over domestic wage and price pressures.

Our global growth forecast for 2024 is unchanged at a sub-potential 2.3%. S&P Global Market intelligence's estimate is marginally above the market consensus expectation, which has been drifting up toward our forecast in recent months. Our forecast for the global growth rate in 2024 has been broadly stable since mid-2023, with the lagged effects of tighter financial conditions to continue to weigh on economic activity. A global recession is unlikely. A gradual pick-up in growth momentum is forecast from the second half of 2024 as lower inflation lifts household real incomes and financial conditions ease, driving an expected acceleration in annual global real GDP growth in 2025 to 2.6% — again slightly above the current market consensus.

Growth prospects for 2024 remain mixed both across, and within, regions. The stability of our global real GDP growth forecast masks significant regional and national variations. Forecasts for the US and Canada, for example, remain indicative of weaker annual growth rates in 2024 than 2023, although our estimate for the US has been raised slightly this month to reflect more accommodative financial conditions than previously assumed. This is offset at the global level by minor downward revisions to 2024 growth forecasts for Western Europe, Japan and Russia. Policy stimulus will continue to support the recovery in mainland China in the near term, but annual growth rates in 2024 and 2025 are still forecast to fall short of the expected 5.4% expansion in 2023. Still, with many economies in the region on track for relatively strong performances in 2024, Asia-Pacific remains a key source of support for the global economy.

Global PMI data continue to signal challenging economic conditions overall. The JPMorgan Global Composite Purchasing Managers' Index™ (PMI™) compiled by S&P Global edged upward for the second successive month in December 2023. Still, at just 51.0, it remained well below its long-run average and consistent with below-potential global real GDP growth. Composite data for the eurozone remained consistent with real GDP contraction, while a sustained — if modest — expansion was again signaled for the US.

Learn more about our top 10 economic predictions for 2024

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.