Optimism is growing among hundreds of economists surveyed by Reuters regarding global growth prospects for this year and next, despite the ongoing risks of higher inflation. Despite their predictions for interest rate cuts, the economists acknowledge that the risks are still skewed towards higher inflation. Last year, most major central banks successfully curbed soaring inflation rates through rapid rate hikes, but a robust global economy with strong employment and wage growth continues to pose a risk of renewed price pressures.
A majority of 56 per cent of economists, out of 202 respondents in a global poll covering nearly 50 top economies from July 8-25, believe that inflation is more likely to exceed their forecasts than to fall short for the remainder of the year. Similarly, the outlook for interest rates is also expected to follow this trend. The global economy is projected to grow by 3.1 per cent this year and next, an improvement from the 2.9 per cent and 3.0 per cent forecasts in an April poll, which aligns closely with the International Monetary Fund’s latest predictions.
Despite this upgraded growth forecast, many central banks are anticipated to reduce rates at least twice by the end of the year. Douglas Porter, chief economist at BMO Capital Markets, highlighted that the global economy has managed to sustain growth despite numerous challenges and the significant tightening cycle over the past two years. He noted that growth is expected to remain around 3 per cent in the second half of the year.
This optimism contrasts with earlier concerns about the U.S. economy’s ability to withstand aggressive monetary tightening without experiencing a downturn, although concerns about China, the world’s second-largest economy, persist. Growth rates for 24 of the 48 top economies surveyed were revised upwards from three months ago, with 13 from developed economies and 11 from emerging ones. Eighteen economies saw a downgrade, and six remained unchanged.
Among major central banks, economists predict that the Federal Reserve and the Bank of England will reduce rates twice this year, and the European Central Bank three times, according to the survey. Forecasters have maintained a more consistent view compared to financial traders and investors. Market expectations for rate cuts have fluctuated, initially predicting six Fed cuts, which has now adjusted back to three.
Given the current growth stability, inflation will largely determine how low interest rates can go and when. A significant majority of central banks, 19 out of 27 with an inflation target, are not expected to meet their targets by the end of 2024. James Rossiter, head of global macro strategy at TD Securities, noted that risks are increasing in global core goods prices, with shipping costs approaching 2021/22 highs. He anticipates that the threat of higher core goods inflation could counteract sticky services inflation and delay rate cuts.
When asked about the most persistent component of core inflation for the remainder of 2024, a majority of 56 out of 104 respondents pointed to services, followed by 30 citing shelter and rents, with the remaining 18 mentioning other factors.
