Economists grow gloomier on 2024 as central banks delay rate cuts

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Persistently higher interest rates in major economies mean global growth is likely to slow next year after outperforming expectations so far in 2023, economists say.

Output will expand 2.1 per cent in 2024, according to an aggregation of forecasts by the consultancy Consensus Economics, down from the 2.4 per cent the economy is expected to log this year.

Economists have upgraded their expectations of this year’s performance by 1 percentage point since the start of the year because of unexpectedly strong consumer demand and labour markets.

Part of the 2024 slowdown will be the result of “some basic arithmetic effects”, of better output this year flattening growth next, said Simon MacAdam, senior global economist at Capital Economics. However, he added that economists had also “genuinely become more downbeat about prospects in 2024”.

The caution centres on the belief that persistently high demand will keep inflation higher for longer, forcing rate-setters in advanced economies to keep borrowing costs elevated well into next year.

“Services demand continued largely unabated, the labour market has stayed strong, wages have continued to rise,” said Nathan Sheets, chief economist at US bank Citi. “Some of the weakness [anticipated for this year] is being pushed in to 2024.”

In many countries, including the US, “there will be a recession, it’s just going to come later”, said Sheets.

Until a few months ago, the Federal Reserve was expected to begin cutting rates this year. However, the strength of the US economy has meant there is a small possibility that rate-setters could increase borrowing costs another quarter point further, to a target range of between 5.5 per cent and 5.75 per cent in September. Economists now expect the first rate cut to come in the spring of next year.

The now strong chance that the US economy will avoid a recession this year “means the Fed will keep rates higher for longer to fully quell inflation, resulting in slower growth in 2024”, said Mark Zandi, chief economist of Moody’s Analytics.

He added that the European economy has also navigated this year “somewhat better than feared”, apart from Germany, which means the European Central Bank and the Bank of England will also likely keep rates higher for longer.

The ECB has raised its deposit rate from minus 0.5 per cent in June 2022 to the current 3.75 per cent and is now not expected to begin cutting for most of next year.

The BoE is expected to increase borrowing costs by another half percentage point to 5.75 per cent by the end of the year and is not thought likely to begin cutting until the second half of 2024.

China’s economic slowdown after the post-pandemic rebound also contributed to economists’ pessimism for 2024. Christian Keller, head of economics research at Barclays, described the country’s slowdown as “structural”.

“The direction for 2024 seems quite clearly for a further global slowdown,” Keller added.

Higher US interest rates meant economists, on average, expected US growth to slow to 0.6 per cent in 2024, from 1.9 per cent this year.

The UK and the eurozone are likely to maintain their pedestrian pace in both years, while China is set to struggle with structural problems and a downturn in manufacturing and exports.

The economies of many emerging markets, such as Brazil and Mexico, have also surprised analysts on the upside this year, while robust domestic demand is set to support India’s healthy economic growth into 2024.