Global economy outlook at odds with aggressive rate cut bets

Global growth is set to stay resilient this year and only pick up pace a bit in 2025, according to a Reuters poll of economists, a stable outlook at odds with still-relatively aggressive interest rate cut bets in financial markets.

Growth among leading economies is not forecast to be consistent, with relative strength in the United States and India, and sluggishness expected from the euro zone, as well as No 2 economy China.

Economists more broadly are optimistic, however, there will not be a resurgence in inflation now most central banks have got price pressures down close to where they want them.

The Jan. 3-25 Reuters polls covering 48 economies showed economists forecasting global growth at an average 2.6% in 2024: not boom times, but not recession either.

This year's view is only slightly weaker than an expected 3.0% rate for 2023 despite a rapid series of central bank rate hikes. This time last year, these same economists were too pessimistic, expecting just 2.1% growth.

Global growth is forecast to accelerate to around 3.0% next year and also in 2026. And with a still-tight labour market across most of the developed world, resilient consumer and government spending, risks to growth were mostly to the upside.

"If you look at the economic outlook for 2024, it's easy to say reasons why it could be bad. But there's no evidence of that in the data yet. There are plenty of reasons in the data already to suggest why it could be better than expectations...a similar story to 2023," said James Pomeroy, global economist at HSBC.

That may come as a disappointment to those in financial markets gunning for aggressive rate cuts.

Rate Cuts Forecast From Mid-Year

Traders started to price in a first Federal Reserve interest rate cut in March after Chair Jerome Powell surprised markets and analysts at the December policy meeting by saying a discussion of cuts was coming "into view".

However, economists in Reuters polls since September 2023 have consistently predicted the first Fed rate cut will come around the middle of this year.

Markets are already swinging back in that direction, with fed funds futures on Thursday implying around a 47% probability of a March Fed rate cut, down sharply from about 90% a month ago.

So while interest rate reductions are coming, if economists' forecasts are right, there won't be so many.

"I think the mistake the markets are making kind of broadly in the pricing is they're pairing a forecast for rates that would, that could, prevail if we're seeing a sharp slowing in the economy," said Nathan Sheets, global chief economist at Citi, who expects a mild slowdown this year.

"I don't think the full force of the monetary policy tightening has been felt yet."

The rate cut trajectory was largely dependent on how quickly central banks will bring inflation down to their targets.

A strong 77% majority of economists, 213 of 277, who answered a separate question said the risk of a significant resurgence in inflation over the coming six months was low (194) or very low (19). The remaining 64 said high or very high.

While inflation has fallen sharply from over 10.0% in some countries to low single digits in the past year, the last leg down to target may not be a smooth ride simply because there is much more scope for small upside disappointments.

"It did come down fairly dramatically, but it's still above target in most major economies and the reality is that underlying inflation is still sticky," said Douglas Porter, chief economist at BMO Capital Markets.