Global growth remains strong, but US rate cuts are elusive

First US rate cuts forecasted to be pushed to September

Bolstered by strong U.S. economic activity and resilient consumer spending, global gross domestic product growth has continued to outperform expectations over the past six months, according to an Oxford Economics briefing on the global economy provided to Grant Thornton International.

Although Oxford expects economic activity to be subdued on a global level for the rest of this year, the downside is much shallower than predicted six months ago.

“Consumers have been willing to spend the excess savings that they accumulated during the pandemic despite high inflation and high interest rates,” said Oxford Economics Economist Robert Bruce. “They’ve been willing to draw upon those savings.”

Oxford also expects interest rates to fall gradually in the coming months, even as it has moved its forecast for the first rate reductions in the United States back four months. After originally predicting the first U.S. rate cuts to take place in May of this year, Oxford is now predicting that the initial cuts will come in September.

The delay is due to inflation in services offerings that is proving stickier than expected. Because the U.S. Federal Reserve is concerned about persistent inflation, Oxford doesn’t expect any sort of aggressive rate cuts in the United States over the next 12 months or so.

“Domestic demand has remained very strong in the U.S., and that’s why our outlook for 2024 is very strong, but with that comes the risk of inflation remaining elevated, and that’s why the Federal Reserve is proving quite cautious about the first rate cut,” Bruce said. “And we expect them to cut rates gradually after that first one.”

Oxford’s positive outlook on the global economy was mirrored by the strong global economic optimism among mid-market business leaders reflected in the International Business Report (IBR) survey data collected by Grant Thornton International in the first quarter of this year. Two-thirds (66%) of respondents expressed optimism regarding the economic outlook of their respective countries, results similar to the second half of 2023 (65%) and the first half of last year (66%).

Business leaders responding to the IBR are expecting to increase investment in technology — particularly in North America — and they list AI as the technology that’s driving their expectations for more investment.

Some bumps in the road

While Oxford predicts that the worst has passed for the global economy following the high-inflation shocks of 2021 through 2023, the road ahead remains bumpy:

• Oxford’s 2024 GDP growth forecasts for the UK, the Eurozone and Latin America are all below 1%, even though the global 2024 GDP growth forecast has been revised upward from 2.1% in December to 2.5%.
• The U.S. consumer price index, a key inflation benchmark, isn’t predicted to approach the Federal Reserve’s 2% goal until early in 2025.
• Trade growth is predicted to be weak across the United States, Africa, Japan and the UK in 2024, with the UK forecast to experience a slight decline in real exports excluding oil. Trade restrictions and geopolitical tensions continue to pose risks in this area, with the delicate U.S.-China relationship remaining a concern. “That said, we don’t expect the world to enter a period of deglobalization,” Bruce said.