The Growing Strength of the Global Economy Goes Against Predictions of Rate Cuts

There is a growing sense of optimism among the hundreds of economists surveyed by Reuters regarding global growth prospects for this year and the next. Despite maintaining their forecasts for interest rate cuts, these economists acknowledge the lingering risks of higher inflation.

Although the majority of major central banks effectively controlled soaring inflation rates through swift interest rate increases last year, the persistent strength of the global economy, along with robust employment and wage growth, has maintained the possibility of price pressures resurging.

Most Economists’ Inflation Forecasts Will Not Come True

Overall, a majority of economists – 114 out of 202 who participated in a global poll covering nearly 50 top economies from July 8-25 – indicated that inflation is more likely to exceed their initial forecasts for the rest of the year rather than fall below them. Similarly, the situation applies to rates.

The projected growth of the global economy for this year and the next has been revised upwards to 3.1%, which is an improvement from the previous forecast of 2.9% and 3.0% in an April poll. This new estimate is in line with the latest prediction from the International Monetary Fund.

However, despite the implementation of that enhancement, it is anticipated that numerous central banks will still reduce interest rates at least two times before the end of the year.

“The significant development to note is that worldwide expansion has continued to progress steadily… the global economy has demonstrated resilience in the face of various challenges and, of course, the substantial period of monetary policy tightening over the past two years,” commented Douglas Porter, the chief economist at BMO Capital Markets.

“Despite facing numerous challenges, the growth rate of over 3% continues to show a steady increase…” Growth will remain steady at around 3% during the second half.

The current positive outlook is in stark contrast to the previous concerns about the ability of the U.S. economy to handle a period of intense monetary tightening without experiencing a downturn. However, concerns about the Chinese economy, which is the second largest in the world, persist.

The growth rates for 24 out of the 48 leading economies examined have been revised upwards since three months ago. Of these, 13 are from developed economies, where there were worries about declining demand, while the remaining 11 are from emerging economies.

The Federal Reserve and the Bank of England Will Cut Rates Twice

According to the survey, economists anticipate that the Federal Reserve and the Bank of England will reduce rates twice this year. At the same time, the European Central Bank is expected to make three cuts.

Forecasters have maintained a more steadfast perspective than financial traders and investors. The market’s initial aggressive pricing for rate cuts at the beginning of the year has since moderated, with expectations of six Federal Reserve cuts decreasing to just one or two recently and now settling at three.

Given the current condition of development, it is abundantly evident that inflation will continue to play a substantial role in deciding the amount to which interest rates may be cut and the timing of such moves. This is because inflation is a significant factor in rising prices. At this time, it is anticipated that a substantial portion of financial institutions, namely 19 out of 27 that have an inflation target, will not be able to meet it by the end of the year 2024.

“There is a growing concern about the increasing risks in the prices of essential global goods, as shipping costs approach their highest levels since 2021/22,” commented James Rossiter, the head of global macro strategy at TD Securities.    

“We anticipate a more minor impact on inflation during this particular period … However, the possibility of increased inflation in core goods may diminish the counterbalance to persistent services inflation and potentially impede rate reductions.

When asked about the component of core inflation that will be the most persistent for the rest of 2024, a majority of the respondents – 56 out of 104 – indicated that services would be the most resistant, while 30 chose shelter and rents. Another 18 mentioned different sources.

A clear majority of 60%, specifically 131 out of 220 respondents, indicated that they anticipate interest rates rising by the end of the year rather than decreasing from their current projections.