Economic and financial risk insights: interest rate cut cycle to pick up pace

• Growth: we upgrade our US 2024 GDP growth forecast (+20bps) while lowering China's (-20 bps).
• Inflation: disinflation is almost complete as we expect CPI inflation to return to the 2% target in H2 2024 in Europe and early 2025 in the US.
• Interest rates: fading inflationary pressure and growth momentum shifts our US rate cut outlook to three cuts this year, from two previously.

Global growth is slowing but still very solid. We see growth momentum declining into 2025 while geopolitical tension adds downside risk. In the US, upward revision to Q2 GDP coupled with robust retail sales and recent activity data (see Figure 1) means we raise our 2024 GDP growth forecast to 2.7% (+0.2ppt). However, we adjust our 2025 forecast lower (1.9%, -0.2ppt) due to slow wage growth and a softer labour market (see Figure 2).

Figure 1:  US and Euro area services business activity indices

Figure 2: Ratio of job vacancies to unemployed people

Disinflation momentum on track, with relief now broadening out to the services sector. US core CPI inflation has fallen to 3.2% in July 2024 from 4.7% a year ago (see Figure 3). Due to declines in core goods and services (in particular, shelter inflation), we lower our US CPI forecasts for 2024 to 2.9% (-0.2ppt).

Figure 3: US core inflation, core goods (excl. food & energy) and core services (excl. energy)  

In the euro area, negotiated wage growth in Q2 2024 (see Figure 4) has come down significantly but we remain cautious and slightly raise our 2024 CPI forecast (2.4%, +0.1ppt) given higher services inflation this summer (see Figure 5) due to one-off events like the Olympics.

Figure 4:  Euro area negotiated wage growth

Figure 5: Euro area goods and services inflation

In China, we lower our CPI forecasts to 0.4% for 2024 and 1.1% for 2025, as weak consumer confidence keeps domestic demand muted. The potential for disruptive trade wars pose upside risks to global inflation.

US Fed signals September rate cut as job market weakens. With inflation on track to 2%, the Fed appears increasingly concerned about downside risks to the labour market. This creates room for potentially more rate cuts but easing to be gradual. We now see three 25bp cuts in the US in 2024 and five in 2025. ECB is also set to cut again this month, with another 25bps cut likely in December. For the UK, this month's BOE meeting is live, but we expect the next cut in November.

The Bank of Japan bucks the trend, and we expect them to increase rates by a total of 75bps by end of 2026 (see Figure 6). Emerging economies such as India and China are expected to lower rates too as they prioritise growth while currency depreciation pressures ease once the Fed starts cutting.

Figure 6: SRI policy rate forecasts and market implied trajectories

Global growth to normalise at a slightly slower rate in H2 2024. Subdued China demand should aid declining global goods inflation.