Global economy enters new phase with policy rate cuts

Rate cuts are being driven by persistent core inflation. Central banks have initiated rate reductions, with the European Central Bank (ECB) cutting rates by 25 basis points on June 6, closely following the Bank of Canada's identical move on June 5. The interplay of demand, inflation, and the pace of rate cuts will dominate the macroeconomic landscape for the next one to two years.

Inflation is decreasing, but unevenly across nations. In areas where growth and demand pressures have notably declined, such as the eurozone and Canada, inflation has slowed, prompting rate cuts. Conversely, in the US, where growth remains strong, inflation progress is inconsistent, and central banks are holding rates steady, as per S&P Global.

The US economy continues to excel among advanced economies, with nearly 3 per cent growth over the past year, significantly above the average. However, quarterly growth dropped from 3.4 per cent in late 2023 to 1.3 per cent in early 2024. Despite this, second-quarter growth is tracking close to 3 per cent, indicating stable private demand.

Labour markets remain tight globally, with low unemployment rates despite varying economic conditions. This tightness is expected in the US, where demand remains high and the output gap positive. The eurozone also maintains a tight labour market despite recent manufacturing recessions.

China's economy struggles with weak consumer confidence. Meanwhile, the Asia-Pacific region sees growth led by emerging markets and open economies. China's GDP growth forecast for 2024 has been raised to 4.8 per cent, but a slowdown is expected due to subdued consumption and robust manufacturing investment. India shows strong growth but is expected to moderate to 6.8 per cent this fiscal year.

Advanced economies are anticipated to see a gradual descent in policy rates, with smaller, spaced-out cuts. Unlike the rapid hikes of 2022-2023, rate cuts are expected to be 25 basis points each, occurring roughly quarterly. Terminal rates are projected to be reached by late 2025 and 2026, remaining on the restrictive side of neutral unless a hard landing necessitates more accommodative policies.

In the US, slower growth in early 2024 masks strong domestic demand, with the first rate cut anticipated in December 2024 and a terminal rate of 2.9 per cent expected by late 2026. In Europe, the ECB cut rates in June, with a terminal rate of 2.5 per cent forecasted by late 2025. Growth is expected to trend back to 1-1.5 per cent annually. However, the UK faces persistent inflation issues and a steeper decline in output and employment. In the Asia-Pacific region, growth remains robust, led by emerging markets. Inflation pressures have eased, but policy easing is delayed due to the anticipated later US rate cuts. China and India present varied growth trajectories. Emerging markets show a clear recovery driven by strong domestic demand, with median growth at 4 per cent. However, risks include sustained US dollar strength and geopolitical uncertainties.

Fibre2Fashion News Desk (DP)