Executive summary
Inflation: Mixed but falling. Despite widespread expectations of a global economic slowdown in 2024, growth and inflation have continued to perform better than the consensus expected across most major economies. Our outlook for the rest of the year centers on the path — or paths — of inflation and how central bankers weigh the balance of risks in beginning to ease monetary policy. While the disinflation narrative has varied across major Western economies, particularly in the US, we still expect inflation to fall further by the end of 2024 across most economies as supply and demand factors come into better alignment. We think disinflation will be faster in non-US developed market economies and that central banks will focus more on the direction of travel rather than the outright level of inflation, meaning they will start to cut rates before their target level is reached, but subsequent cuts will be gradual.
Growth: Resilience, not recession. In our view, the global economy remains in a soft patch, driven by a restrictive monetary policy backdrop that translates into belowtrend but still resilient growth. Divergence has re-emerged as a theme, with individual economies likely to see various growth and inflation experiences going forward. For example, we continue to expect US exceptionalism in growth and relative softness in eurozone performance, but relative equity market performance is likely helped by positive surprises. In Japan, the weak yen and structural reforms have helped rekindle inflation and enabled the Bank of Japan to begin a very gentle tightening process. In China, the continued overhang of weakness in the property market mixed with slowly improving consumer sentiment indicates an environment of below-trend but improving growth.
Markets: Risk assets have more upside. Markets appear to have priced much of this already, but we maintain a risk-on stance. Credit spreads are reflecting a healthy readout on macro fundamentals, and equities indicate continued earnings growth. Throughout the rest of 2024, markets are likely to be reactive to shifts in the rates outlook, including any supporting or conflicting data points along the way. In our view, the precise number of rate cuts is less important than the view that the next move is a cut rather than a hike, especially as the market narrative continues to be highly volatile. We highlight a significant risk that markets are overly positive and have not fully priced in potential problems. Given the positive macro backdrop, we favor an overweight to risky assets but keep risks tightly controlled, as very tight valuations limit the upside for risky assets.
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