As the global economy undergoes a gradual descent towards stabilization, experts are closely observing the impact on interest rates. The recent economic developments have reinforced the likelihood of an extended period of elevated interest rates, sparking discussions among economists and policymakers. Given the uncertain economic landscape, it is essential to analyze the potential implications of these changes on various industries and markets. In this article, we explore the intricate dynamics at play and consider the future implications of interest rates on the broader economic outlook.
Global Economic Growth Forecast
We anticipate global growth of 3.2% this year and 3.4% next year, aligning with the 3.2% growth in 2023. These estimates surpass previous expectations and exceed the estimated global annual growth rate of about 2.6%. Despite recurrent predictions of a recession, economic growth has defied expectations, leading to a soft landing that supports credit ratings, sustains spending and investment, and keeps unemployment and non-performing loans at low levels.
Regional Economic Outlook
The eurozone economy has shown signs of improvement in recent months, as evidenced by the first-quarter GDP growth and purchasing manager surveys. We forecast a growth of 1.0% this year and 1.7% in 2025 for the eurozone economy. While Germany’s growth is projected to be modest at 0.2% this year, it is expected to increase to 1.4% next year. France and Italy are experiencing growth rates slightly below expectations, while Spain and other previously distressed economies in the eurozone periphery continue to outperform the eurozone averages. Outside the EU, the UK economy is expected to grow by 0.8% this year, a significant improvement from last year.
Global Growth Disparities
The pace of growth in Europe lags behind that of the United States, which is poised for a robust 2.7% increase in output in 2024, surpassing earlier forecasts. In emerging economies, China is projected to achieve a 5.2% growth rate this year, aligning with the government’s annual target of 5%. While Europe is expected to experience stronger growth next year, the trend is likely to be reversed in regions outside of Europe.
Balanced Macro Risks for 2024
Upside risks identified for the global economy have materialized to some extent, particularly in China, the world’s largest economy by purchasing power. While our outlook for 2024 indicated a “balanced” risk profile for the global and European economies, macroeconomic risks persist. Persistent inflation could prolong current interest rate levels, leading to further tightening of monetary policy under adverse conditions. Geopolitical tensions may exacerbate economic consequences unpredictably, potentially causing financial instability amidst prolonged high interest rates. Additionally, consumers may reassess sovereign risks amid escalating policy uncertainties and economic challenges.
A Higher Neutral Rate Post-Crisis
The expectation of sustained high interest rates has been a longstanding observation, with rate cuts commencing later and being less significant than market expectations. Anticipating a prolonged period of interest rate stability by the Federal Reserve, the Eurosystem faces constraints due to the potential depreciation of the euro. The European Central Bank (ECB) initiated rate hikes after the Federal Reserve but maintained a more conservative approach, recently lowering rates for the first time in five years, preceding a similar move by the US counterpart. Consequently, the ECB is likely to exercise caution in further rate adjustments, aligning with the actions of other central banks such as Canada, Sweden, and Switzerland. Our baseline projection includes higher benchmark rates compared to pre-crisis levels, which may pose challenges for heavily leveraged borrowers adapting to an extended period of tighter monetary policy.