Investors can head into the second half of 2024 with optimism that a global recovery is under way and inflation has finally been tamed, with lower interest rates to follow.
“Conflicting economic data in the first half of the year made it hard to determine where the global economy was headed, but there are now clear signals showing continued, steady growth,” says Seth Carpenter, Morgan Stanley’s Chief Global Economist. “We can expect some volatility as the global economy tries to find the lower gear that maintains forward momentum without reviving inflation. Still, we have nudged our 2024 global growth forecast to 3.1%, up from 2.8% in our November 2023 outlook.”
While the reduction of inflation is a common theme, different countries are likely to see uneven growth, with some bumps along the way. The U.S., for instance, may experience a slowdown, diverging from the growth path of the rest of the world, while emerging markets could show higher levels of growth than the eurozone. Export-led economies are seeing improvement, with purchasing manager data in Europe and Asia signaling a bottom or the start of a moderate recovery.
Here are the key trends for investors to watch.
Interest Rate Cuts Are Finally on the Way
Investors waiting eagerly for lower interest rates are likely to finally get their wish. Morgan Stanley economists anticipate the European Central Bank will cut rates in June, with inflation on track to drop to its target levels around year’s end. The ECB is expected to cut 75 basis points this year and 100 basis points next year. The Bank of England is expected to start lowering the policy rate in August.
The U.S. Federal Reserve, meanwhile, will likely start cutting its benchmark rate in September—a slower start than its European counterpart because of uneven data on inflation. Morgan Stanley’s forecast has the Fed cutting three times in 2024, reducing rates by a total of 75 basis points, followed by 100 basis points’ worth of cuts in 2025. The pace of the Fed’s path will be dictated by inflation data over the next two years. The trend, though, is that prices should continue to moderate, suggesting that inflation will fall to the Fed’s 2% target by the end of 2025.
Meanwhile Asia emerging markets face a very modest easing path, as China holds rates low as it manages deflation and central bankers across the region are unlikely to move ahead of the Fed. Any rate trims in Latin America should also be shallow as deflation, albeit slowing, continues and central bankers will have to balance currency considerations as they ease policy rates.
Immigration Assists U.S. Growth
The U.S. economy is being pulled in several directions. As the Fed has kept interest rates higher for longer, businesses and consumers are feeling the pinch, slowing demand for goods and services. At the same time, elevated levels of immigration are providing a strong labor supply and productivity.
Morgan Stanley economists anticipate U.S. growth of 2.6% in 2024 and 2.1% in 2025, compared with 2.5% in 2023. Year-over-year growth is likely to moderate toward the end of 2024 with fourth-quarter GDP growth of 2.1%, compared with 3.1% in the fourth quarter of 2023.
“Despite our view for growth above 2% for the U.S. this year and next, we see slack building and, along with inflation coming down to Fed’s target, expect unemployment to reach 4.2% and 4.5% in the final quarters 2024 and 2025, compared with 3.7% in the fourth quarter of 2023,” says Chief U.S. Economist Ellen Zentner.
China Manages Deflation
A recovery in exports helped China achieve higher-than-expected growth in the first quarter of this year, but persistent deflation bringing down prices of goods and services will weigh on growth. The continued need to manage debt in the housing market, and as well as in the local governments that funded the real estate boom, means that fiscal expansion will be limited. In addition, the debt-deflation cycle and a soft labor market are suppressing domestic demand. Morgan Stanley expects 4.8% growth this year and 4.5% in 2025.
Demand Drives Growth in Japan
In Japan, by contrast, decades of deflation are now over. The economy shifted in 2023 from stagnation to nominal growth—and a virtuous cycle in wages and prices. This allowed the Bank of Japan to end the negative interest rate policy it had had in place for eight years.
The bullish case for Japan is playing out as predicted at the start of this year, with both domestic and foreign demand driving growth. Morgan Stanley believes this demand is outstripping the economy’s potential for production, creating a positive gap and sustaining inflation that had started primarily through higher prices for imported commodities. Morgan Stanley is forecasting 3.3% nominal GDP growth in 2024, down from 5.7% last year but still quite notable, in fact Japan’s nominal growth exceeded China’s last year—a result that would have seemed unthinkable just a few years ago.
India Is Surging
Growth in India already strong thanks to three megatrends of global offshoring, digitalization and energy transition, may become more broad-based across both consumer and business spending. Morgan Stanley forecasts 6.8% growth in 2024, and 6.5% next year, and thinks inflation will stay within policymakers’ comfort zone.
The stronger global growth we are predicting benefits India, leading to higher income from exports and supporting domestic capital spending. There is potential for a faster-than-expected recovery in capital expenditures, driven by a stronger business environment and policy reforms.
