Global Macroeconomic Outlook

The major global macroeconomic story of the first half of 2024 has been how the slowdown in the pace of disinflation delayed the start of monetary easing which markets had expected at the start of the year. This is particularly true of the US, where strong household balance sheets have propped up consumer spending and helped GDP growth hum along nicely while it sputtered elsewhere.

• Slowdown in pace of disinflation delayed start of monetary easing cycles
• ECB hiked rates in June, but won’t commit to a particular policy path going forward
• Fed turned hawkish, signalling just one rate cut this year
• Geopolitics a risk for remainder of 2024 with key elections ahead in France, US

Whereas the US economy grew 2.5% in 2023 – and global growth was 3.2% – for the euro area that figure was just 0.5%, after GDP contracted by 0.1.% in the last three months of the year from the previous quarter. In the US, core inflation – which strips out volatile elements such as food and energy – peaked at a year-on-year rate of 6.6% in September 2022 and had only come down to 3.4% as of May 2024, the most recent reading. That’s a slower convergence towards the 2% target than Fed officials had anticipated. Core inflation peaked at 5.7% in the euro area and stood at 2.9% as of May. For this year as a whole, we expect headline inflation – which includes food and energy – to average 2.4% in the euro area, compared with 3.2% in the US.

At the start of the year, a common view among market participants was that many ECB officials, stuck in a game of “follow the leader”, wouldn’t want to ease monetary policy unless the Fed did so first. That changed as the months went on and communication from the Fed became increasingly hawkish. By the time ECB President Christine Lagarde said, after the Governing Council’s April policy meeting, that “we are data-dependent, not Fed-dependent”, observers understood this as a clear signal that the euro area’s central bank would soon go ahead with the rate cuts its ailing economy needed, regardless of decisions in Washington DC. The ECB signalled that it would cut rates by 25 basis points at its June 6 meeting, and that’s exactly what it did, lowering the deposit rate to 3.75%. It wasn’t the first major developed economy central bank to cut rates, with Switzerland, Canada and Sweden all having already started their easing cycles.

June was a later start to the easing cycle than the one that markets had expected from the ECB at the start of the year and, in the US, easing still appears some way off. Updated forecasts, following the conclusion of the Federal Open Market Committee’s most recent policy meeting on June 12, showed that Fed officials now expect to cut interest rates just once this year, down from three 25bps cuts after the last update in March. At the time of writing, futures markets were pricing in 48bps of cumulative Fed easing this year, with the first fully-priced-in rate cut coming by November. That’s a stark contrast with the start of the year, when they were pricing in 157bps of cumulative easing, with a 97% implied probability that the first cut would come by March 2024.

However, recent weeks have brought new twists to this story that will be critical to shaping the macroeconomic developments in the second half of 2024. First, economic growth started to get firmer in the euro area. After the slight contraction in Eurozone GDP in the fourth quarter of 2023, the economy grew 0.3% on a quarterly basis in the first three months of this year. Overall, we expect that GDP will grow 0.7% in 2024, which is much lower than our 2.4% growth forecast for the US, but there are a few encouraging signs in recent data suggesting that Eurozone growth might surprise to the upside. Business survey data showed some notable improvements in May, indicating that some growth momentum may be building, while Germany’s economy expanded by a higher-than-expected 0.2% in the first quarter, as the region’s biggest economy avoided a technical recession and has hopefully passed the trough in its business cycle.

While welcome, these improvements have removed some of the ECB’s justification in pressing ahead with the start to the easing cycle in June, since inflation has also been slow to converge on the 2% target in the euro area. In fact, May’s 2.9% core inflation print was a surprise increase from 2.7% the month before. Meanwhile, euro-area wage growth unexpectedly increased at the start of 2024. Having telegraphed a June rate cut so strongly in advance, it was impossible for the Governing Council to perform a U-turn without serious consequences for its credibility in markets. However, when the cut came, it was a hawkish one, with Lagarde refusing to commit to a particular policy path forward.

The other twist is that recent US data is showing some belated signs of cooling labour markets and prices. While the pace of disinflation may have slowed this year, May’s CPI print was lower than expected, with the slowdown in price growth proving to be broad-based. To be sure, the recent data isn’t unambiguous – for instance, the uptick in the unemployment rate to 4% in May from 3.9% the month before came in what was otherwise received as a hot jobs report – and there are too few data points to be able to discern a trend from the noise.

Aside from the course of monetary policy, geopolitical risks are high for the remainder of the year, with French elections at the end of June and early July driving Eurozone peripheral spreads wider at the time of writing. Then there are the US elections in November, which will be pivotal in shaping big power relations in the next four years, with conflict still raging in the Middle East and Ukraine. These factors pose risks for a renewed surge in supply-side driven inflation.

By Marcus Bensasson, Research Economist, Eurobank Research

(This article first appeared in the 2024 edition of The Cyprus Journal of Wealth Management, commissioned by Eurobank Cyprus and published by IMH. Click here to view the article. Click here to view the entire magazine online.)