According to Fathom’s Global Outlook, Spring 2024, advanced economies will avoid recession over the forecast horizon (which goes up to the end of 2026), with the global economy showing resilience against inflation and high interest rates. There has however been a divergence in the performance of major advanced economies, which Fathom expects to continue.
Looking at growth in real GDP, the US has outperformed both the euro area and the UK, with positive growth recorded in each quarter since 2022 Q3. The euro area and the UK experienced slightly negative growth in 2023 Q3 and Q4. According to the conventional rule-of-thumb that puts both the UK and euro area in recession — although recessions are typically associated with a significant rise in the unemployment rate, which hasn’t happened so far. Fathom expects all three economies to expand this year, but for economic performance to continue diverging across major advanced economies.
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Both headline and core inflation have fallen across the three economies. Inflation in the UK remained higher for longer than in the US or euro area, although it has started falling rapidly. US headline inflation fell sharply from its June 2022 peak; but it increased in February and March, suggesting that inflation could be stickier than expected. Investors have trimmed rate-cut bets accordingly. New numbers show euro area inflation continuing to fall, approaching the 2% target, and the ECB may now be able to cut rates before the Fed.
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The global economy has remained resilient despite tight monetary policy, with consumption in particular staying buoyant. And non-energy consumption may well be boosted as inflation has been falling and consumer confidence is now rising.
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One of the reasons why consumption has held up so well in the US is that consumers have been dipping into their pandemic savings.
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Another factor helping consumption is the historically low levels of household gearing (the proportion of disposable income that is spent on interest payments), which has been offsetting the negative consequences of increasing debt payments due to higher interest rates.
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According to Fathom’s central scenario, developed markets are gradually converging towards their old, pre-COVID economic trends after bouncing back from the pandemic shock. Real household disposable income, for example, is back on its pre-COVID trajectory for the US at least (it is still a bit low for the UK and euro area), implying that the impacts of the cost-of-living crisis and COVID shutdowns are broadly over. But this implies a return to muted growth in the US, and weak or no growth elsewhere. It also suggests that nominal interest rates are likely to revert down close to zero and inflation is set to converge towards pre-COVID averages.
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In conclusion, the global economy has shown resilience to high inflation and interest rates. Looking ahead, Fathom expects the developed economies to avoid a major recession over the forecast horizon, and to move towards their pre-COVID trends of structurally weak trend growth in the US and weak or no growth elsewhere.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
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