Inflation is easing and growth is stabilizing, but geopolitical conflicts and fiscal uncertainty still threaten a global soft landing.
Global economic growth will continue expanding this year and hold steady next year, with some weakness in the United States and China and some rebounding in the euro area, according to global forecasts. These say that doomsayers will be proved wrong, and recession avoided, with central bankers slowly but steadily restoring more neutral monetary conditions as inflation falls to desired levels.
But geopolitical tensions are creating risks, with an expanding conflict in the Middle East on one hand and war in Ukraine on the other, and with spreading protectionism that likely won’t abate regardless of who wins the US presidential election in November.
According to the July World Economic Outlook Update published by the International Monetary Fund (IMF), global growth will likely be 3.2% this year, slightly down from 3.3% in 2023, and projected to slightly increase back to 3.3% in 2025.
“We’ve seen the global economy show remarkable resilience to this very fast rate-hiking cycle, and we expect that resilience to endure as monetary policy returns to normal,” Elena Duggar, chair of the Moody’s Macroeconomic Board, tells Global Finance. “Global growth is stabilizing, but declining a little bit as we go through the year in the United States, and rebounding in the euro area; but overall, it’s really stabilizing to this new post-pandemic equilibrium, and we expect a soft landing for most of the G20 economies.”
Most economists expect a US soft landing, with GDP growth slowing to around 2% in 2025 from 2.6% this year. Moody’s forecasts global growth slowing to 2.7% in 2024 and 2.5% in 2025, from 3% in 2023. Moody’s also sees a deceleration in the advanced G20 economies to 1.7% in 2024 and 1.6% in 2025, from 1.8% last year, and a decline in growth in G20 emerging markets to 4.1% in 2024 and 3.8% in 2025, from 4.7% in 2023.
“I think the US economy is in good shape for a soft landing,” says James Bullard, dean of the Mitchell E. Daniels School of Business at Purdue University and former president of the Federal Reserve Bank of St. Louis (the St. Louis Fed). “To me, a soft landing means that output grows at the potential growth rate, that the job market is in pretty good balance, and that inflation is moving back toward target and isn’t too far from target. All those things are happening.”
“And you know, GDP growth looks to me like the run rate is maybe between 2% and 2.5% for 2024,” Bullard adds. “That’s pretty close to the potential growth rate, or a little above the potential growth.”
Since the end of last year, the Federal Reserve has consistently debated when or if it should cut its benchmark rate from a 23-year high of 5.5%, a level maintained since July 2023. After August’s annual inflation report showed the rate falling to 2.5% from 2.9% in July, the Fed finally shifted toward an easing policy in September, cutting interest rates by 50 basis points to 5%, a more aggressive move than many forecasts had anticipated.
“It is difficult to find much fault with the Fed’s approach to policymaking over the past year. Powell faced some criticism in the early part of 2024, with some arguing that an overly dovish message at the last FOMC meeting of 2023 was to blame for the uptick in price pressure we saw over Q1. However, it was the market that took the Fed ending its hiking cycle as a green light to price in substantial cuts,” says Conor Beakey, Head of Americas, BMI, a Fitch Solutions company. “The Fed has appropriately changed its tone in response.”
Mideast Conflict And China Are Wildcards
The probability of a recession appears lower than it did 12 months ago, say several economists who place it well below 10%.
But David Andolfatto, chair of the Department of Economics at the University of Miami’s Patti and Allan Herbert Business School, says, “One cannot forecast recessions. When recessions come, they are usually triggered by unforecastable events; they come as surprises. You know, the Covid-19 shock, for example. The reason why a recession risk might be elevated over the next year, in my view, might be because of the geopolitical concerns.”
Andolfatto, who is also a former senior vice president of research at the St. Louis Fed, warns that the risk of recession comes from the energy spike that would be associated with an escalation in the Middle East conflict—an event that Moody’s is also highlighting in its recent forecasts. But barring such an event, economists do not expect a recession to hit.
A big change in the world economy is coming from China, where the outlook is weaker than usual and where a real estate crisis is holding back economic expansion.
“I wouldn’t say that China is crashing. I wouldn’t say that China is improving. It’s bumping along at a lower level of economic activity. We’ve seen some attempts for stimulus, and those stimulus attempts haven’t really shown a lot of results. That’s probably going to be compounded with continued trade friction,” says Joe Fitter, director of the MBA Strategic Finance Academy at the Kelley School of Business, Indiana University.
Beneficiaries Of China Decoupling
Moody’s sees China growth at 4.5% this year, down from 5.2% in 2023, and falling to 4% in 2025. Fitter observes that US businesses are exiting China gradually and moving to other emerging markets.
“I think the decoupling trend will continue,” says Fitter. “I think it’s going to continue at a slow and steady pace, rather than something that is massive and happens overnight. Manufacturing will shift out of China to potentially avoid tariffs; so some emerging economies will continue to benefit from that shift, such as Mexico, Vietnam, and some of the other countries,” like India, he added.
According to the Moody’s forecast, India and Indonesia are the two countries with the highest expected growth in 2024, with 7.2% and 5%, respectively.
In 2023, India did better than China, with a respective GDP growth of 8.2% and 5.2%, according to the IMF’s July World Economic Outlook Update. The IMF projects this trend to continue, with India’s GDP up 7% and China’s up 5% in 2024. But economists caution that it is difficult to predict if the trend is sustainable.
“China is richer than India, and the two countries have such a different level of income that India [would need to] grow at 8% for 20 or 30 years to catch up and become a high-income economy,” (which is currently defined by the World Bank as a country with a gross national income above $14,000 per capita), says Partha Chatterjee, professor of economics at Shiv Nadar University, outside of New Delhi near the satellite city of Noida.
“We cannot now take growth as granted. There’s a sense among some that, no matter what, India will grow; but I don’t think we should be complacent in that sense,” Chatterjee adds. “I think there are certain reforms, maybe certain policy changes, that India has to undertake to ensure that in the short run, we do not face any crises. More important is the long-term growth, which is the next 20 to 30 years, when the demographic transition will finalize itself in some ways so that happens. As a corporate economist would say, we have to be cautiously optimistic about the growth.”
India’s very high ranking for the number of new startup companies, as reported in recent success stories, remains an isolated trend that does not extend the availability of funding to more-traditional industries, Chattarjee points out.
Prime Minister Narendra Modi’power was weakened in his third term, after his Bharatiya Janata party lost its singular majority in the June election. Now reforms in India appear less likely and more difficult to implement.
The US Election And A ‘Fiscal Mess’
Investors will focus on the US presidential election in November; but pundits do not see a big difference between the two parties on how the deficit issue will be handled, despite the big question mark on the potential for renewal of some tax breaks in the 2017 Tax Cuts and Jobs Act passed by the Republican-controlled Congress.
The tax code overhaul cut the corporate tax rate to a flat 21% from a tiered rate ranging from 15% to 39%, among other changes. The bill is expected to add more than $2 trillion to the deficit by 2028, according to estimates by the Congressional Budget Office (CBO); but many provisions will expire in 2025, and one of the big decisions of the new president will be whether to extend or eliminate them.
What is different from the recent past is that, depsite recent rate cuts, long-term interest rates will probably be higher for longer. “The pre-Covid world with superlow interest rates is over,” says economist Riccardo Trezzi, founder of Underlying Inflation, a consultancy for private equity and hedge funds on macroeconomics and economic policy, “and this means that public fiscal deficit will become more relevant, with higher spending to fund the public debt as a consequence.”
In a paper published in July with co-authors Guido Ascari, Giancarlo Corsetti, and Tilda Horvath, titled “The US Fiscal Mess: Some Unpleasant Fiscal Simulations,” Trezzi showed how “the US federal debt is expected to grow to historic highs over the next decade.”
“Across all fiscal consolidations considered, the debt/GDP ratio and interest will increase at least until 2026-2027. Growth is not a way out: Without corrective measures, nothing short of unrealistic growth of 4% or more would work, and recession risks remain. A decade-long plan ending in 2034 could work but would require [bipartisan consensus on] ambitious fiscal reforms over the period,” they write.
The paper cites a CBO estimate that “the US federal debt (held by the public) is projected to grow from 99% of GDP in 2024 to 122% in 2034—‘higher than at any point in history.’”
On November 10, 2023, Moody’s lowered its outlook on the United States’ credit rating from Stable to Negative, while reaffirming the nation’s top credit rating of Aaa. The move signals an increased risk that the rating could be downgraded over the next year or two. The two other major credit rating agencies, S&P and Fitch, had both already downgraded the nation’s rating—S&P in 2011 and Fitch in 2023.
“Among the G20, the three worst countries where fiscal strength is a concern are Italy, the US, and China,” says Moody’s Duggar. The rating agency has a negative outlook on the sovereign ratings of China also, but a stable outlook on the sovereign ratings of Italy. “There are debt concerns with all three countries, but the issues are slightly different. In Italy, government debt levels are high. In the US, debt levels and debt-servicing costs are projected to rise materially over the coming years. In China, total economy debt has risen materially over time, especially in the corporate sector and the local and regional governments sector.”
Besides the longtime concern over Italy’s debt, “the US and China are more worrying because of the trajectory and because the service of debt—the cost in interest payments—is becoming higher. Especially in the US, interest payments as a share of government revenue will rise quickly going forward,” Duggar says. “The other big part of the equation is you have this political polarization in Washington with parties facing troubles in agreeing on fiscal correction.”
Economists often count on the US because of the international demand for assets denominated in dollars, and they stress that the best solution could come from a weak presidency.
“This election has a lot of uncertainty around it, because not only is the White House up for grabs in a close election, but also the House of Representatives and the Senate. It’s not clear to me that either party will be able to win all three of those,” says Bullard. “I think divided government is a distinct possibility for the ultimate outcome. And in the US, when there’s divided government, that usually means not too much gets done. And usually financial markets like that outcome.”
The excessive deficit in the US would eventually manifest itself as inflation, because that’s how the Fed would handle a case where the demand for US Treasuries is lower than its supply.
“If this problem comes home to roost, it’s going to manifest itself primarily as inflation. That’s not good, but it’s not the end of the world either,” remarks the University of Miami’s Andolfatto. “This side is very, very unknown and not forecastable. As things stand today, the global demand for US Treasuries continues to be very robust. But of course, the million-dollar question is: How long can that last?”
Longer term, economists are optimistic and point out that GDP growth could expand, and technology might help economic growth in the US and abroad.
“The potential growth rate of the US economy could be something like 2.25% from now until the end of the decade. That is slightly stronger than what we’ve seen over the past couple of years, which is at 2% or slightly below 2%,” says Michael Pearce, deputy chief US economist at Oxford Economics.
“We’ve seen this big surge in a kind of dynamism in the US economy, accompanied by increased investment in areas which have been associated with stronger productivity and growth in the past,” Pearce says. “So that leads me to think the rise in productivity growth of the last few years is not just a cyclical phenomenon, but instead reflects some underlying dynamics changing in the economy.”
