PERSPECTIVE3-5 min to read

Who really will be higher for longer?

In the latest update to our forecasts, we explain how the diverging fortunes of the world’s major economies will have important implications for policymaking and financial markets.

21/12/2023
Editorial

Authors

Keith Wade
Chief Economist & Strategist

The global economy is set to trundle along at fairly sluggish rates of growth of about 2.2% over the next two years as it continues to disinflate.

While the headline figures may be uninspiring, less synchronised global activity means that the diverging fortunes of the world’s major economies is likely to have important implications for policymaking and financial markets.

World GDP forecast

US growth may remain resilient in the near term

The US economy has continued to defy gravity as consumers keep spending against a backdrop of buoyant labour market conditions and excess household savings. Question marks over how the budget deficit will be funded have further tightened financial conditions through the bond market.

We expect growth to slow as higher rates feed through to activity. However, an outright recession in the US remains unlikely, and we expect the economy to largely stagnate in 2024.

Recessions should ease price pressures more quickly in Europe and the UK

Elsewhere, the growth outlook in other parts of the world is not rosy. While fading activity has helped to bring down inflation, the European economy is likely to have fallen into recession before the end of 2023. Meanwhile, following a long period of stagnation, the UK economy will probably follow suit in the first half of 2024.

Monetary policy in advanced economies is probably at peak restrictiveness, but the divergence in economic fortunes is likely to determine whether interest rates really will remain “higher for longer”.

The case for keeping interest rates elevated in Europe is not obvious and the European Central Bank (ECB) could deliver a first rate cut fairly early in 2024. Deteriorating fundamentals also suggest that the Bank of England (BoE) may not be far behind.

The Fed unlikely to pivot until the second half of 2024

Despite early signs of softening, we have pushed back our expectations for US monetary policy and now think the Federal Reserve (Fed) will not start easing until the second half of 2024 as policymakers fret about a second wave of inflation.

Continued US exceptionalism is likely to keep the US dollar supported in the near term, before gaping twin deficits eventually start to weigh on the currency. Meanwhile, delayed rates cuts, along with question marks over who will fund the larger fiscal deficit, suggests that US Treasury yields will remain relatively high.

Mainland China showing signs of stabilisation, with hopes to achieve 5% growth in 2023

Elsewhere, economic data from Mainland China showed some welcome signs of stabilisation in the second half of 2023 to soothe fears of a hard landing. As a result, GDP growth in 2023 should ultimately exceed the government’s 5% target.

However, the economy continues to contend with the end of housing-led growth. Measures aimed at supporting housing transactions in higher-tier cities, along with support to ensure the completion of outstanding projects, will help the sector to some degree. The authorities in Beijing have been in loosening mode for some time and further easing is likely.

Looser economic policy and near-term support from manufactured exports may lead to some cyclical improvement in underlying economic growth in the months ahead. Overall, we forecast China GDP growth of 4.5% and 4.3% in 2024 and 2025 respectively.

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.

Authors

Keith Wade
Chief Economist & Strategist

Topics

Follow us

Contact Us

Level 33, Two Pacific Place, 88 Queensway, Hong Kong

(852) 2521 1633

Online enquiry: Please complete the web form below and we will reply as soon as possible.

Contact us

The investments mentioned in this website may not be suitable to all investors. The information contained in this website is provided for reference only and does not constitute any investment advice. Investors are advised to seek independent advice before making any investment decision.

Investment involves risk. Past performance is not indicative of future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Please refer to the relevant offering document including the risk factors.

This website is intended for Hong Kong residents only. Non-Hong Kong residents are responsible for observing all applicable laws and regulations of their relevant jurisdictions before proceeding to access the information contained herein. Schroder Investment Management (Hong Kong) Limited is regulated by the SFC. The website (excluding Schroder Provident Plan related pages) has not been reviewed by the SFC.

The website is issued by Schroder Investment Management (Hong Kong) Limited.

Important notice: Schroders does not make unsolicited requests through emails, calls, messages, WhatsApp, WeChat, Facebook, Instagram applications. Any contact other than via Schroders’ official channels for personal or financial information is likely to be false and fraudulent. Please stay vigilant and refer to our Fraud Alert Notice for further details. If you have doubts about the person, platforms, websites or institutions that claim to be associated with Schroders, please contact us via (852) 2521 1633 and inform the local police.