subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now
Picture: 123RF
Picture: 123RF

Global economic activity was relatively resilient in the first half of the year, especially in the US, according to the World Bank, with world GDP growing by 2.4% year on year. This compares with growth of 2.6% in 2023 and a 10-year average of about 2.7%, which includes the global recession in 2020 due to the effects of Covid-19.

Though economic confidence has been undermined by the war between Russia and Ukraine and the expanding conflict in the Middle East, a significant moderation in global inflation to an average of 2.1% in September is supporting household spending. It has allowed most major economies to start reducing interest rates.

A number of key risks need constant monitoring. These include an expansion of the armed conflict in the Middle East that could push oil prices higher and have a negative effect on global supply; the introduction of import duties by the US to deter trade with China; a sharp weakening of the US labour market, which could push the economy into recession; and erratic weather patterns that could disrupt global food supply.

Most major economies should avoid recession

Global growth remains acceptable, despite a two-year phase of elevated interest rates, but there is a significant difference between the US and the eurozone and among emerging-market economies. For example, recent economic data from China and the eurozone has been disappointing. In contrast, Indonesia is expected to continue to grow at more than 5% for the third consecutive year, while India is on track to achieve 7% growth. GDP growth has also been relatively resilient in other advanced economies, including Canada and Spain, while economic activity in Japan improved noticeably in the second quarter of the year after contracting in the first quarter.

Importantly, however, US economic growth has again been surprisingly strong. In the second quarter it grew by 3% quarter on quarter, up from a more modest 1.6% in the first quarter. The improvement was partly driven by increased consumer spending, underpinned by real wage gains due to the further moderation in inflation. There was also a solid increase in fixed investment activity.

Despite evidence to suggest that the US labour market is softening, the economy added an impressive 254,000 jobs in September, which was well above market expectations. The unemployment rate improved to 4.1% in September from 4.2% in August. A strong labour market significantly reduces the chances of US economy falling into recession. However, we expect the pace of US economic growth to slow to about 1.5% in 2025, hurt by the fading fiscal impulse and gradual moderation in consumption as household income decelerates.

One of the important dynamics shaping the performance of the US economy is household savings and wealth. US household net wealth rose by $2.76-trillion in the second quarter to a total of $163.8-trillion, which is a record high. Many US households still have plenty of savings sitting in bank accounts and money market funds.

Global inflation has slowed, though risks remain

Over the past year most major central banks have forecast a continued moderation in inflation, which has become significantly more evident in recent months. Eurozone inflation slowed to 1.8% in September after reaching a peak of 10.6% in October 2022, US inflation was 2.4% in September from a high of 9.1% in June 2022 and China’s inflation rate stayed low at 0.4% in September, with an increased risk of slipping into deflation.

The slowdown in global inflation is partly due to sustained high interest rates. It also reflects an improvement in global supply conditions after the Covid-induced disruptions, lower commodity prices (including oil, which has declined by almost 5% over the past 12 months) and excess production capacity in China.

Importantly, now that the global interest rate cutting cycle is well under way it is not clear how loose monetary policy needs to be to ensure that inflation is kept under control while economies are able to grow at a solid pace.

Global rate cutting cycle under way

The moderation in global inflation and slowdown in economic activity has encouraged most major economies to start cutting interest rates after enduring relatively high interest rates for most of 2022 and 2023.

In the past 12 months more than 50 central banks have cut rates, including the US, eurozone, UK, Canada, Switzerland, Sweden and SA, and most central banks are expected to continue to reduce interest rates in 2025. If, as we expect, the US and eurozone can avoid going into recession in 2025, the US Federal Reserve could take its reference interest rate down to a range of 3.25%-3.5% in the second half of 2025 and the European Central Bank could cut rates to about 2.25%. Interest rates could then be kept on hold for an extended period, possibly for all of 2026, especially if GDP growth is in line with trend growth and inflation is close to target.

One of the key risks to this scenario, besides the escalation of violence in the Middle East, would be a US presidential victory by Donald Trump. Trump’s campaign has indicated plans to impose 60% tariffs on imports from China and 100% tariffs on Chinese-made electric vehicles coming into the US from Mexico. This would be bad news for world trade as it would open the door for a wider range of countries to impose trade restrictions, increasing the cost of imports or forcing consumers to buy domestically manufactured goods at a higher price.

While higher protectionism is not good for global growth, some countries are geopolitically and geographically well placed. They can benefit from growing trade frictions between other trading partners, if they avoid getting caught up in a self-defeating cycle of higher tariffs and instead implement key structural reforms to make their economies more efficient.

• Lings is chief economist at Stanlib Asset Management.

subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now

Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.