The intensity of political events, in a year plagued by key elections in many regions of the world, and the continuity of two war conflicts with tragic consequences contrast with the resilience of the global economy, which continues its process of very soft landing of activity and inflation almost silently.
The good performance of the services sector and the effects of the fiscal policy measures of recent years have offset the interest rate increases since mid-2022. The…
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The intensity of political events, in a year plagued by key elections in many regions of the world, and the continuity of two war conflicts with tragic consequences contrast with the resilience of the global economy, which continues its process of very soft landing of activity and inflation almost silently.
The good performance of the services sector and the effects of fiscal policy measures in recent years have offset the interest rate increases since mid-2022. Global growth will be relatively weak in the next two quarters, with some slowdown in United States and a slow recovery in the eurozone, which began to grow at the beginning of the year after five quarters of stagnation. Overall, global GDP growth is expected to be 3.1% this year, after the 3.2% accumulated last year, highlighting the resilience of the US economy (with a forecast of 2.2%), well above in Europe despite the improvement (0.7%), and a structural slowdown in China. By 2025, a certain global recovery is expected to take hold, up to 3.3%.
But the economic focus is currently on whether the disinflation process is complete, and to what extent it can allow central banks to reduce interest rates from restrictive areas to more neutral levels. In principle, the fall in inflation will continue despite the upward surprises in the first half of the year derived from the aforementioned strength in demand for services. These are less subject to international competition and are more affected by wage increases to recover lost purchasing power.
The temporary moderation of growth and the continuity of disinflation will allow the two largest central banks to cut interest rates this year. The European Central Bank (ECB) has already begun to do so, before the Federal Reserve, and it is foreseeable that it will continue to do so in the remainder of the year with two more reductions, and several additional ones in 2025. More important for the global economy will be the pace of declines in the United States, which should begin the process in September and proceed gradually.
In any case, let us not forget that we are entering a world with upward risks of inflation in the medium and long term due to structural factors such as demographic deterioration, resistance to immigration, growing protectionism and industrial policies that prioritize security over efficiency, but which eventually have an economic cost that is transferred to prices. All of this may lead central bankers to be more cautious than expected and interest rates to be higher.
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