Economic and Strategy Viewpoint – Q1 2024

• Investors and economists alike had thought that policy makers needed to engineer mild recessions to reduce inflation pressures. And yet, inflation has fallen sharply over the past year and is almost back to target for the major central banks. This has occurred while economies have outperformed expectations, against a backdrop of interest rates rising by more than had been expected a year ago.
• An "immaculate disinflation", whereby inflation moderates while economic activity continues to grow, and unemployment remains low, appears now to be playing out.
• As inflation continues to fall, central banks have started to change the tone of their communication. References to upside risks for interest rates have largely been removed, while discussions of downside risks have remained. Expectations are building that interest rates will be lowered as we progress through this year, but there are still questions over how much easing will follow.
• The outlook for the global economy is looking brighter. Global GDP growth in the new Schroders forecast has been revised up from 2.2% to 2.6% for 2024 and from 2.2% to 2.7% for 2025. Meanwhile, global inflation is forecast to slow from 4.4% in 2023 to 2.9% in 2024 (unrevised) and to 2.5% in 2025 (revised down from 3%).
• In the US, the economy has proven to be far more resilient, all whilst inflation has continued to moderate. Job creation is easing but is set to remain healthy, supporting consumer spending which is also benefitting from improving real income growth as inflation continues to fade. Falling inflation should allow the Federal Reserve to start cutting the fed funds rate this summer. However, the Schroders baseline forecast only has 100 basis points of cuts between now and the end of 2025 – materially above market expectations.
• The eurozone has managed to avoid a technical recession, but manufacturing heavy countries such as Germany are struggling. Growth has been revised marginally higher, mostly on the back of a better external outlook, although domestic demand is also expected to recover through 2024. Falling inflation and interest rates from the spring should support a recovery in household spending.
• The recession-marred UK economy is likely to see a sluggish recovery through 2024, largely owing to more sticky inflation and structural supply problems. Pre-election fiscal giveaways will help growth at the margin, although will also contribute to inflation pressures that could limit interest rate cuts this year and next.
• China is seeing a near-term improvement in the external outlook, but underwhelming support from fiscal policy is likely to mean weak household demand will come to the fore as government spending fades. Meanwhile, overcapacity is leading to steep discounting and weaker commodity prices, particularly in foods. We have cut our inflation forecast and assume the current bout of deflation pressures will prove to be temporary.
• New risk scenarios have been introduced to better capture growing political risk. Overall, the balance of risks are skewed towards higher growth and inflation – the first time since the third quarter of 2020.

The full Viewpoint is available as a PDF here.