Global Forecasts Are Little Changed
The inflation story is progressing roughly as anticipated, with the caveat that the disinflation process had paused in the US earlier this year. We, however, see this as a temporary phenomenon.
Considerable Market Volatility
Since our last update in March, the global economy has progressed largely as anticipated. Global growth remains moderate but steady, with broadening signs of a bottoming out in manufacturing, improvement in Europe and a visible deceleration in the US. Chinese economic growth has stabilized but remains constrained, with weak consumer sentiment and ongoing challenges in the property sector. Consequently, there has been no change to the global growth forecast this quarter, and only modest adjustments to individual countries.
The inflation story is also progressing roughly as anticipated, with the caveat that the disinflation process had paused in the US earlier this year, while continuing to unfold elsewhere. We see this as a temporary phenomenon driven largely by peculiarities around shelter inflation calculations in the US and a delayed catch-up cycle in insurance (home and auto). US inflationary pressures are increasingly narrow and, given normalizing labor market and anchored inflation expectations, the disinflation process is set to resume. The much-improved May inflation report supports this interpretation. For now, the Fed has remained on the sidelines even as other developed market central banks (most recently, the ECB and Bank of Canada) have started lowering interest rates. Nevertheless, the Fed might join the easing cycle later in the year and quicken it in 2025. The “different speeds, same direction” mantra we applied to global disinflation in 2023 applies to global policy easing in 2024-25.
Political and geopolitical risks loom large. Elections in Mexico, India, and the European Union all brought surprising outcomes, highlighting the limitations of forecasting exercises. As we gear up for US elections in November, investors are bound to grapple with rising volatility. Risks to all forecasts are elevated and two-sided.