2024 Global Macroeconomic Outlook
Fourth Quarter
Global Fixed Income team’s view as of 8/28/2024
Global Economy: Mixed Signals Persist
Key Data Highlight Growth Concerns
The recent downward adjustment to a year’s worth of government jobs data suggests the labor market wasn’t as strong as it appeared. The U.S. Labor Department said its employment data for the 12 months ended in March likely overstated the number of jobs gains by 818,000.
The unemployment rate in July climbed for the fourth consecutive month, reaching its highest level in nearly three years. Elsewhere, U.S. manufacturing continued to slump, remaining in contraction territory for the fourth straight month in July. Conversely, recent service sector and retail sales data were upbeat, highlighting the economy’s mixed bag. We still believe consumer spending will slow, further pressuring the jobs market and the overall economy.
GDP Expands but Modestly in Europe
Amid continued weakness in Germany, the eurozone economy has slowly expanded, largely due to improving household incomes. However, growth has been weak, and the backdrop has been mixed as interest rates and inflation remain high. The region’s services sector climbed into expansionary territory in February and stayed there through August. But manufacturing has contracted all year and dropped to its lowest level in eight months. In the U.K., the manufacturing and services sectors have steadily expanded, and gross domestic product (GDP) has slowly climbed. However, high interest rates may pressure the near-term growth rate.
China Faces Uneven Growth
Weaker-than-expected second-quarter growth highlighted China’s fragile economic recovery. Amid falling new home prices, the nation’s property crisis has deepened, sinking consumer confidence and further straining local governments’ debt burdens. Additionally, mounting deflationary pressures have prompted a range of businesses to slash prices alongside weak retail sales. Slowing consumer demand and the challenges in the property sector have prompted China’s government to boost spending on infrastructure and manufacturing. The central bank also unexpectedly cut rates in July. Combined with continued export growth, these efforts aim to get China’s growth trajectory back on course.
Inflation: Most Consumer Prices Are Still Rising
U.S. Inflation Rate Slowly Moderating
We expect inflation to continue easing at a slow pace but sufficient enough to support Federal Reserve (Fed) easing. Services costs, particularly for shelter, remain the driving forces of still-elevated inflation in the U.S. While an increase in multifamily housing units should lead to lower rent resets, other pricing pressures persist within the broad housing market. The nation faces a shortage of homes, which is helping to fuel price appreciation. Meanwhile, we expect goods prices to remain flat or move slightly lower, but we see upside risks from rising shipping costs, broad deglobalization and potential tariffs. Additionally, wages remain elevated but have shown signs of declining along with weaker employment data.
Inflation Stalls in Europe
After moderating early in 2024, European core inflation (excluding food and energy prices) reversed course and held steady at 2.9% (annualized) from May through July. Persistent pricing pressures kept the European Central Bank (ECB) on hold after cutting rates in June. Policymakers are walking a fine line, trying to balance economic support with their inflation mandate. However, they expect a softening labor market and moderating wage growth to help drive inflation to the target level by early 2025. The Bank of England faces a similar challenge, as core inflation has slowly moderated but remains well above target. Policymakers cut rates in August but cautioned they will proceed cautiously amid lingering pricing pressures.
Inflation Remains Below Target in China
Unlike its developed markets peers, China is facing persistent below-target inflation. After recovering in February from a four-month bout of deflation, the nation’s annual consumer price index climbed slightly for six straight months, led by non-food prices. However, food prices, the index’s largest component, remained weak. This factor, as well as low consumer confidence and diminished demand, has kept the annual inflation rate well below the central bank’s 3% target.
Monetary Policy: Central Banks Proceed Cautiously
“Time Has Come” for Rate Cuts
Although the Fed’s target inflation rate remains elusive, a policy shift is underway. At the annual Kansas City Fed’s Jackson Hole Economic Symposium in late August, Fed Board Chair Jerome Powell noted, “The time has come for policy to adjust.” Powell’s remarks coincided with a notable increase in the U.S. unemployment rate in July. Policymakers recently noted a growing focus on their dual mandate of promoting full employment and stable prices. They believe inflation is headed toward their 2% target, but labor market concerns are brewing. We still expect slowing consumer spending to weaken the economy, which should help ease inflationary pressures and give the Fed room to cut rates again before year-end.
European Central Bank Is on Pause
As the Fed moves closer to cutting rates, policymakers in Europe, the U.K. and Canada have already cautiously shifted to easing mode. The Bank of Canada cut rates in June and July, while the ECB and Bank of England (BoE) each have one cut on their books. Despite market expectations for additional cuts, ECB officials have remained cautious amid continued inflationary pressures. Similarly, BoE policymakers expect inflation to reach the central bank’s target level but remain wary of lingering risks. Nevertheless, we expect additional cuts from both before year-end. Meanwhile, the Bank of Japan is on an opposite course after raising rates twice this year amid persistent inflation.
China’s Central Bank Supports Fragile Economy
Following weaker-than-expected second-quarter growth, the People’s Bank of China cut key lending rates to record lows in July. Policymakers followed up with a pause in August, noting they would avoid any “drastic” economic measures. Nevertheless, growth may downshift without additional central bank support, and deflation may remain a threat. Accordingly, we believe policymakers may need to take more aggressive action to stimulate the struggling economy.
Interest Rates: Yields Likely to Trend Lower
U.S. Rates Heading Into a Cyclical Downturn
While inflation, Fed policy and other cyclical factors are near-term drivers of lower interest rates, we expect secular trends to push longer-maturity rates higher over time. Our near-term outlook calls for inflation to ease, interest rates to fall and economic growth to slow. Once these datapoints bottom, we believe fiscal policy will emerge as a dominant force pushing interest rates higher. Larger fiscal deficits and higher interest rates go hand in hand, given the need for increased U.S. Treasury issuance to fund the government’s record deficit spending. And to keep investors interested in purchasing longer-maturity Treasuries over time, Treasury yields must remain at attractive (higher) levels.
European Yields Should Head Downward
With the ECB and BoE now in easing mode, we expect yields in Europe and the U.K. to decline slowly. Dovish monetary policy, slowing inflation and sluggish economic growth data should keep government bond yields on a downward trend. In our view, yields in Germany and the U.K. remain among the most attractive.
EM Rates Likely to Follow U.S. Rates Lower
High U.S. interest rates have been the main factor pressuring emerging markets interest rates. As the U.S. economy slows, the Fed eases and U.S. rates decline, we believe more EM central banks will follow suit to defend their currencies.
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