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Waiting for the main act

Global Economics Quarterly

  • Globally, more central banks have started to cut rates…
  • …but with a bumpy road ahead for growth and inflation…
  • …the majors are still watching, and waiting to act

If there were any doubts we are in a different era for monetary policy, they were put paid to by the Bank of Japan's decision in March to finally lift its negative rate back to zero.

Globally, though, the tide has turned in favour of easing policy: Mexico and Switzerland's central banks the latest to join the rate-cutting club. But the main act has yet to start, with most G10 central banks – notably the US Federal Reserve, the European Central Bank and Bank of England – still waiting patiently in the wings.

With inflation no longer surprising on the downside and growth in many economies proving more resilient than feared, they seemingly have time on their side. Policymakers are waiting to become more confident that inflation will continue to head down to target on a sustainable basis before easing. Reading the data tea leaves is not getting any easier though: this is still a very complicated economic picture.

this is still a very complicated economic picture

On the growth side, there have been some green shoots in recent months. The US and India have outperformed again. Even in those parts of the world where data have disappointed for some time, including part of Europe and mainland China, the data are no longer getting worse, particularly in manufacturing. And there are early signs world trade may be picking up.

But inflation data have been less positive, with services inflation sticky in advanced economies like the US and eurozone. There have been upside surprises in Latin America and parts of Asia too. Central banks are watching to see whether this is a “bump in the road” or something more concerning.

Meanwhile, the problems at New York Community Bank (NYCB) served as a reminder that high interest rates can still act as a catalyst for big problems long after policy rates stopped rising. And this is all happening against an overlay of geopolitical conflicts and tensions which could mean further surprises ahead.

In this uncertain world, maintaining policy credibility and anchoring inflation expectations is critical for any central bank. We expect the Fed, the ECB and the BoE to start cutting interest rates in June. But the easing cycle that follows could be just as unusual as the economic expansion and tightening cycle that preceded it.

Our forecasts
Most of our growth forecasts are virtually unchanged from three months ago, but with the familiar exception of the US where our growth forecast has once again edged a little higher, as has India’s. Hence, we have lifted our annual average global GDP growth forecast for 2024 to 2.6% (from 2.4%). We also see GDP growth of 2.6% in 2025.  On inflation, too, our forecasts of only a gradual disinflation are much the same as at the start of the year. We anticipate global inflation of 5.8% in 2024, and 3.8% in 2025.

Average global GDP growth forecast for 2024 (HSBC Global Research)
Average global inflation forecast for 2024 (HSBC Global Research)

We admit, though, that there is even more uncertainty than usual about forecasts for next year given the possibility of escalation in geopolitical conflicts and the potential impact of elections in many parts of the world. Fiscal policy could also materially change the outlook. Difficult policy choices lie ahead for governments facing an array of new spending needs.

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