Interest rates and global economic outlook: What to expect in 2024

LONDON 

Central banks are expected to start slashing policy rates by mid-2024, but the cuts are unlikely to be as sharp as the hikes made in recent months, according to several leading economists. 

The world economy had a year with a number of headwinds from supply chain disruptions and soaring inflation, which led to central banks raising interest rates to very high levels.

This year was also one of slower-than-expected growth in China and its impacts, as well as overall low confidence.

While there have been improvements in some of these areas, some of the problems are making their way into 2024, Ken Wattret, vice-president for global economics at S&P Global Market Intelligence, told Anadolu.

“Inflation is coming down at different speeds in different countries, but the general trend is down. We are getting closer to the point where central banks will start to lower interest rates and, hopefully, most of the interest rate rises are behind us already,” he said.

Last week, the US Federal Reserve kept its policy rate unchanged, in line with expectations, at a 22-year high range of 5.25%-5.50%.

The Bank of England also kept its policy rate at 5.25%, while the European Central Bank too maintained its main refinancing operations, marginal lending facility and the deposit facility at 4.50%, 4.75% and 4.00%, respectively.

Recent figures showed the downward trend has accelerated, with headline inflation at 2.4% in the Euro area, 3.1% in the US and 4.6% in the UK.

Central banks, mostly in major economies, are saying that rates will remain higher for longer to bring inflation back to target levels of 2%.

“This is a balance. What central banks are trying to achieve is to slow economies down, but not overdo the tightening, so they do not tip them into recession. That is very difficult to achieve,” Wattret said.  

Premature expectations for cuts

The peak of central banks’ policy rates in the US and Europe has passed and financial markets are expecting deep cuts in 2024, according to Wattret.

“We think those expectations are a little premature, and it is likely that central banks will want to maintain some degree of restriction in their monetary policy, at least … until the middle of 2024 to lean down on inflation,” he said.

“It is unlikely that they will be cutting interest rates as quickly as they raised them. It looks as if they have succeeded (to contain inflationary pressures) to an extent, but they are probably worried that the underlying shift in inflationary pressures may persist.”

Annual global consumer price inflation is projected to be at 4.7% in 2024, down from an estimated 5.6% in 2023 and a peak of 7.6% in 2022, according to S&P Global Market Intelligence forecast.

Brian Coulton, chief economist at Fitch Ratings, said rates will rise in real terms through 2024 as inflation slows more quickly than policy rates.

“After a major battle against inflation over the last two-and-a-half years, central banks will be very cautious about making a premature declaration of victory and, hence, will only cut rates slowly,” he told Anadolu.

“They are more worried about not getting inflation back to 2% on a sustainable basis than they are about harming growth through over-tight policies.”

Decisions of central banks about when and how quickly to start cutting interest rates will be one of the main dynamics for the global economy in the coming year, according to Ahmet Ihsan Kaya, principal economist at Britain’s National Institute of Economic and Social Research (NIESR).

“Although headline inflation had fallen significantly, mainly due to lower food and energy prices, core inflation in advanced economies remained persistent. We expect central banks to keep policy rates high for an extended period, weighing on global growth prospects in 2024,” he told Anadolu.

“This relatively rapid decline in inflation and weaker output growth led markets to price an earlier interest rate cut by monetary authorities. As inflation rates continue to fall, monetary authorities in both advanced economies and emerging markets will begin to withdraw their restrictive policies from the second half of 2024. However, we believe this will be gradual, as core inflation rates are still too high relative to targets.”

However, Antonio Afonso, professor of economics at Lisbon School of Economics and Management, said it remains uncertain whether central banks will keep interest rates high for a long time, particularly given that the US is heading to elections.

“In fact, the forecasts of international organizations are flagging lower real economic growth ahead and inflation is somehow reverting its upward trend. Not seeing a reversion of interest rates would be rather detrimental,” he told Anadolu.

Food and energy prices currently contribute less than 30% to inflationary pressures across a broad group of economies, as much of disinflation had been driven by falling energy prices, according to Alexander Plekhanov, director of Transition Impact and Global Economics at the European Bank for Reconstruction and Development (EBRD).

"Consequently, disinflation has been slowing down in recent months. The pressures come from the tight labor markets in some economies and expansionary fiscal stance in other economies. The pace of disinflation has been largely in sync with what monetary authorities expected a few months back,” he said.

Plekhanov pointed to the important role fiscal policy plays in shaping output and prices.

“Hence, the monetary stance is likely to depend on fiscal policy choices. Some governments can withstand increases in borrowing costs more easily than others, those with a high stock of public debt. Higher government deficits (more spending) would likely mean higher interest rates for longer,” he told Anadolu.  

Hope for 2024 growth spurt ‘too optimistic’

There is still some way to go to overcome the general drag on economic growth from higher interest rates and less favorable financial conditions, according to Wattret.

“It is probably too optimistic to hope that 2024 will bring a positive growth spurt. Though, hopefully some of these headwinds will progressively diminish and as we get towards the end of the year, maybe the economic outlook could start to improve,” he said.

Global annual real GDP is forecast to grow at a slower pace of 2.3% in 2024, compared with an estimated 2.7% in 2023, according to S&P Global Market Intelligence data.

Fitch Ratings forecasts world economic growth to fall sharply to 2.1% in 2024, compared to its revised forecast of 2.9% for 2023.

“The lagged effects of monetary tightening will weigh on US growth next year as credit slows, investment weakens and household income and profit growth falls. Real interest rates will also rise as the Fed is slow to cut rates while inflation falls back,” said Coulton of Fitch Ratings.  

US, Europe recession assessment

“We do not expect a recession in the US. There are various supports for growth, which we think will keep recessionary conditions at bay,” said Wattret.

“But probably the next phase is to see the US economy slow down in the same way that we have seen other regions, including Europe.”

Most of Western Europe is already in recession, according to him.

“I think, in part, that is because the region has had an additional shock which the US did not suffer from, and that is the increase in energy prices and changes in in the sources of energy following Russia’s invasion of Ukraine,” he said.

“Europe is already struggling in a near recessionary environment, whereas the US so far has held up relatively well.”

Coulton expects the eurozone economy to see “only a shallow recovery” in 2024, with falling headline inflation and recovering real wage growth expected to spur consumption.

“Consumption should see a mild acceleration in Europe, while US consumption will slow,” he said.  

Emerging markets

Asian economies had a different approach from advanced economies of the West due to relatively lower levels of inflation, which led to limited responses from central banks and, consequently, less negative impacts on economic activity, according to the economists.

“That is one of the reasons why we think Asia-Pacific as a region will continue to be the main growth engine during 2024,” said Wattret, stressing that there will be important differences within the region, notably China’s slowing growth rate.

According to Fitch Ratings’ baseline forecast, the Chinese economy will grow by 4.5% in 2024.

“But with the housing collapse ongoing, there are downside risks,” Coulton warned.

“China’s growth will be hit by the export slowdown and the knock-on effects of the sharp decline in housing construction, amidst very weak consumer confidence.”

Due to COVID-19 lockdowns, slower economic growth and the liquidity squeeze on property developers, China’s housing market growth came to a halting point, with two of its largest private sector developers defaulting on dollar bonds.

According to official data, new construction starts in China dropped by 2% in 2020 compared to 2019, but 11% and 39% in 2021 and 2022, respectively.

Kaya noted that emerging markets are outperforming advanced economies, but some countries are seeing slowing GDP growth.

The main medium- and long-term risk for Asian countries is a slowdown in China due to the significant trade links, he said.

“Singapore, Hong Kong, Vietnam and South Africa will be particularly affected by the slowdown in China,” he said, referring to a NIESR report.

Both China and India will grow more slowly than in previous decades due to high interest rates and also structural factors, he added.​​​​​​​