Economic Outlook

ECONOMIC OUTLOOK

Central banks to pivot on rates

Highlights of our 2024 scenario: soft landing for the economy, inflation continues its gradual fall, central banks pivot and governments normalise fiscal policy at different paces.

Soft landing in the economy. We expect a gradual slowdown in developed economies. The run-down of excess savings and the impact of past monetary tightening will likely depress economic prospects. On the other hand, still healthy labour markets and declining inflation should help bolster household purchasing power and avoid any drastic slowdown. The US economy should continue to grow faster than Europe's, thanks in part to a more accommodative fiscal policy in a highly contested election year. Meanwhile in China, the economy will likely continue to be hampered by its troubled real estate market.

Inflation continues to fall, but some effects linger on. Inflation is falling in both the United States and Europe, to 3.4% year-over-year in the US, 2.9% in the euro area in December and

3.9% in the UK in November (compared to peaks of 9.1%, 10.6% and 11.1% a bit more than a year ago). Driving this is the fade-out of short-term inflationary factors due to Covid and of the surge in commodity prices. However, it is likely to be several months yet before the main central banks see underlying inflation return to its 2% target. Labour markets remain strong in both the United States and Europe and this should sustain some inflationary pressure via wages. In Europe, this effect will be exacerbated by weak productivity gains. Moreover, new structural inflationary factors are now coming through, including a softer pace of globalisation (pushing up import prices) and policies to combat global warming (pushing up energy prices).

Central banks faced with asymmetric inflationary risks may opt for prudence. Central banks were tightening policy hard until the summer of 2023. The Federal Reserve (Fed) made its likely last hike in late July, the Bank of England in early August and the European Central Bank (ECB) in September. Markets are now pricing in a sharp and speedy reversal of policy with hefty rate cuts starting in March. However, with inflationary risks still tilted toward the upside, monetary authorities may opt to tread a more cautious line. We expect the main central banks to pivot in sync as from Q2 with rates then coming down at a gradual pace.

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Headline inflation (year-over-year)
Bloomberg consensus forecasts