Impact of Geopolitics - Global Economic Outlook
Geopolitical effects on economy
Global economic outlook - Key economic issues in the spotlight
The global economic outlook for 2024 suggests that expectations of central bank rate cuts in the US and Western Europe, while recently moderated, still appear somewhat overstated. Policy rates are forecast to settle at levels well above their pre-pandemic lows. Additionally, consumer price inflation rates are expected to trend down during 2024–25 but remain above pre-pandemic norms in advanced global economies. Similarly, sovereign bond yields are projected to stay well above pre-pandemic levels, although anticipated decreases in inflation and policy rates hint at further declines.
Furthermore, enhanced policy stimulus is anticipated to bolster short-term economic growth in mainland China. However, a continuing downward trend in the long term is forecast. Various headwinds, including structural challenges, are expected to weigh on global growth in the coming years. Despite these obstacles, the Asia-Pacific region is anticipated to be the key long-term growth engine. Moreover, weaker US growth and narrowing interest rate differentials suggest that US dollar depreciation may continue. However, the US dollar’s dominance in international finance and its preeminence as a global reserve currency are expected to persist. The impact of geopolitics has emerged as a serious threat to financial stability.
2024: A disjointed world - geopolitical risk
In 2023, we anticipated a year marked by geopolitical risk recalibration, observing shifts in competitive dynamics among nations alongside cooperative efforts in various arenas. Our tracking and forecasting of these dynamics through the year highlighted a global business environment still attempting to find a clear path toward stability — an endeavor further complicated by conflicts in the Middle East. This fragmented landscape abides in 2024, with significant volatility looming across economic and political spheres. Key indicators include pivotal elections across regions, central bank stances on monetary policy, costs associated with mitigating global supply chain risks and logistical hurdles. Trade and industrial policies are increasingly influenced by political and national security considerations, reflecting ongoing contentious relations among major global players.
Amid this uncertainty, investors and operators face the challenge of predicting and quantifying the outcomes of geopolitical shifts. Emerging global economies strive to carve out their positions in this complex global business environment, often seeking new alliances while weighing the associated geopolitical risks. The reality of greatly segmented global relationships presents numerous opportunities for exploration. There are overlapping geopolitical themes for 2024 such as economic fault lines, geopolitical reordering, supply chain resilience, logistics adaptation, resource security, among others. These themes are interconnected, with each influencing the others and none developing in isolation. Specific aspects of each theme are deemed vital for the year ahead and beyond, emphasizing the need for a fluid and flexible approach by policymakers, companies and stakeholders to navigate this disjointed world effectively.
Factors that significantly impact economic growth and stability.
Economic growth prospects continue to perk up
S&P Global Market Intelligence revised its global economic growth forecast for 2024, marking an upward adjustment. The annual real GDP growth projection now stands at 2.6%, up from an initial forecast of 2.3% at the beginning of the year. This revision reflects increased expectations for growth in several countries, including the US, the UK and India. Notably, the global GDP forecast remains higher than the market consensus expectation of 2.4%, a trend observed since the outset of 2023. Looking ahead to 2025, the annual global real GDP growth forecast remains unchanged at 2.6%.
Quarter-over-quarter global real GDP growth hit a low point of 0.4% in the final quarter of 2023, with a projected uptick to 0.8% by the second half of 2024. The anticipated support to economic activity stems from two primary sources: a boost to household real incomes due to lower inflation rates and a more accommodative financial environment.
Reduced recession risk
Flash PMI data has provided reassurance regarding the global economic outlook growth trajectories in major economies, dispelling concerns of a looming recession. US and UK flash PMIs indicated robust finishes to the first quarter in terms of business activity, with composite PMIs showing slight dips since February but still signaling reasonable growth at 52.2 for the US and 52.9 for the UK. These surveys suggest a potential 0.4%-0.5% quarterly GDP expansion for the US and a roughly 0.25% gain for the UK, based on historical relationships. Meanwhile, the eurozone PMI approached stabilization, edging up to 49.9.
The UK and eurozone data suggests emerging recoveries from downturns while the US maintains its trend of sustained expansion. Encouragingly, the flash PMI data for Japan also indicated the fastest growth since August 2023.
Output growth measured across these four large economies consequently accelerated in March 2024 to its fastest since June 2023. The rush to loosen monetary policy to stave off recession risk, which seemed all-pervasive at the end of last year, has therefore calmed.
S&P Global PMI with HCOB; au Jibun Bank.
Global consumer price inflation in 2024 has been revised slightly upward
At 4.8%, global consumer price inflation is still projected to fall from 2023’s annual average of 5.7%, but disinflation has become more uneven in recent months. Global consumer price inflation slipped to 4.4% in January 2024, according to S&P Global Market Intelligence estimates, down by over 4 percentage points from its peak in September 2022, but only marginally below the mid-2023 level.
In recent months, annualized inflation rates have shown a slight uptick. Persistent concerns surround sticky service prices, with our measure of consumer price inflation for services in the G5 economies inching up to 5% in January 2024. This represents a marginal decrease of just over 1 percentage point from the peak observed in 2023. However, we maintain our expectation of a gradual moderation in inflation, supported by ongoing indications of a gradual easing of pay pressures as tracked by wage indicators.
Conversely, our measure of core goods consumer price inflation in the G5 economies experienced a sharp decline in January 2024, falling below 1% after peaking at over 8% in 2022. Furthermore, PMI data for January and February 2024 suggests minimal impacts from disruptions to shipping routes, reinforcing our belief that inflationary pressures will likely remain relatively contained in the absence of major additional geopolitical shocks.
Data compiled March 15, 2024
F=forecast
Source: S&P Global Market Intelligence
Price pressures surged globally during 2021–22, driven by factors such as rising commodity prices, supply chain disruptions, recovering demand and the base effects of COVID-19. Energy and food prices contributed to significant spikes in headline inflation rates, exacerbated by Russia's invasion of Ukraine. Additionally, core inflation rates experienced notable increases. Looking ahead, the trajectory of core rates will depend on several factors, including the development of spare capacity, inflation expectations and wage trends, which will ultimately influence higher unit labor cost growth.
Global consumer price inflation declined from a peak of 8.3% in September 2022 to an estimated 4.4% in January 2024, although the timing and extent of these decreases have varied among countries. Forecasts generally predict further declines in consumer price inflation rates throughout 2024–25, aligning with the ongoing rebalancing of supply and demand dynamics. Disinflation in core goods has been particularly pronounced, with near-term upside risks stemming from shipping-related disruptions and increased container rates.
However, weak demand conditions are anticipated to constrain the extent to which these factors affect prices. Conversely, services inflation rates have displayed relative stickiness, reflecting tight labor markets in many economies. With wage growth trackers indicating a moderation, global inflation is expected to continue its gradual downward trajectory.
Impact of geopolitics - global conflicts
Global conflicts ripple across economic and geopolitical landscapes. In Europe, the ramifications of the Russia-Ukraine and Israel-Hamas wars loom large, with maritime transport disruptions through the Red Sea posing challenges to global supply chains and inflationary pressures. The Russia-Ukraine conflict continues to unsettle European energy security, exacerbated by sanctions. The specter of renewed spikes in oil and European natural gas prices hangs over the region.
Meanwhile, Israel's war in Gaza fuels regional instability and heightens maritime risks in the Red Sea and Gulf, particularly along the border with Lebanon. In the Middle East and North Africa region, Egypt and Tunisia confront significant challenges regarding debt sustainability, underscoring their economic vulnerability. Despite Turkey's improving economic outlook, its growth potential remains constrained by a debt service burden.
In the Asia-Pacific, the South China Sea is forecast to experience heightened nonmilitary confrontations, while the Taiwan Strait and Korean Peninsula seem less likely arenas for military escalation, according to S&P Global Market Intelligence. These multifaceted conflicts underscore the interconnectedness of global affairs, which necessitate nuanced strategies to navigate their complexities.
Global food security: Understanding inflation impact and government responses
As the world grapples with ensuring food security for all, insights from diverse regions shed light on the multifaceted nature of the challenge and the strategies being employed to address it. Africa needs about USD 1.3 trillion annually until 2030 to meet sustainable development goals. At this stage, a lot of the money is coming from governments, but with ongoing fiscal consolidation, the private sector will have to get involved.
Across regions such as Asia-Pacific, Latin America and sub-Saharan Africa, higher food prices have led to a notable uptick in overall inflation rates. In Asia-Pacific, food inflation has surged, driving consumer price inflation close to the upper limit of central bank targets. Similarly, Latin America has seen significant improvements in inflation rates, albeit with some exceptions: Argentina and Venezuela, for instance, are facing triple-digit inflation. Meanwhile, in sub-Saharan Africa, inflation remains vulnerable to global food price fluctuations and disruptions in the food supply chain, compounded by factors such as the COVID-19 pandemic and geopolitical conflicts.
The repercussions of food security on the workforce and jobs are profound. In regions such as Asia-Pacific and sub-Saharan Africa, where a significant portion of the labor force is engaged in agriculture, lower food output and higher prices can directly affect livelihoods and income levels. In India, for example, farmers' protests highlight the discontent arising from reduced agricultural output and increased indebtedness. Similarly, in Latin America, while the agricultural sector presents opportunities for employment growth, climate disruptions and labor unrest pose challenges to stability.
The link between food security and social unrest is evident across regions. In Latin America, protests often target profitable economic sectors, disrupting supply chains and impacting government stability. In Asia-Pacific, cost-of-living concerns fuel demonstrations, particularly in countries such as India, where farmers demand higher minimum prices for agricultural commodities. Likewise, in sub-Saharan Africa, political instability and conflicts exacerbate food security challenges, leading to humanitarian crises and economic setbacks.
Governments have implemented various strategies to address food security concerns. In Asia-Pacific, measures include strengthening buffer stocks, price controls and subsidies to mitigate the impact of higher food prices on consumers. Latin American countries have pursued policies to stabilize inflation rates, including interest rate adjustments and partnerships with the private sector to enhance agricultural productivity. In sub-Saharan Africa, governments are investing in agricultural research, social safety nets and regional trade agreements to bolster food security efforts.
Collaboration and innovation remain key as governments navigate the complexities of ensuring food security. Disparities in resources, infrastructure and governance require tailored approaches to address each region’s specific challenges. By leveraging partnerships between governments, businesses and civil society, the world can move closer to achieving sustainable and equitable food systems for all.
Monetary policy movements
On the monetary policy front in the US, economic projections reveal a nuanced landscape shaped by global and regional factors. The unexpected robust growth reported in the final quarter of 2023 prompted an upward revision for 2024, with forecasts indicating an increase from an initial estimate of 1.4% to 1.7% in GDP growth. Moreover, core inflation rates for personal consumption expenditure (PCE) remained stable at 2.0% in the fourth quarter of 2023, reflecting the Federal Reserve's commitment to maintaining inflation near its 2% target. However, this narrative of stability is juxtaposed with anticipated rises in unemployment rates, projected to peak at 4.4% in late 2025, because of past monetary tightening measures.
Meanwhile, the Federal Reserve's decision to leave its policy rate unchanged at 5.25%-5.50% in June signals a cautious approach to economic management. Chair Jerome Powell's remarks, emphasizing the economy's resilience but dismissing expectations of an imminent rate cut, underscore the central bank's commitment to gradual adjustments. This strategic stance aims to navigate the delicate balance between sustaining growth momentum and guarding against inflationary pressures.
As for monetary policy in Latin America, the financial authorities in the so-called LatAm 5 are transitioning to a less restrictive stance, aiming for a neutral policy that neither accelerates nor reduces economic growth. A neutral interest rate is achieved when the economy is at full employment with stable inflation. Brazil and Chile have made significant moves toward this neutrality, and with well-anchored inflation expectations, Brazil's central bank could potentially reduce rates by another 300 basis points, while Chile's could cut rates by 200 basis points.
Mexico is expected to follow a similar path. However, the Bank of Mexico (Banxico) must consider the actions of the US Federal Reserve to avoid significantly narrowing the spread between US and Mexican interest rates, which could lead to capital outflows. We believe that Mexico and Colombia have more room to lower interest rates, but this may need to wait until inflation is under control. Peru also has the capacity to reduce its policy rate further to achieve a neutral stance.
The Bank of Japan has taken a historic step toward normalizing its monetary policy. Solid results from wage negotiations influenced the bank's March decision. It maintains that sustainable inflation should be driven by consumer demand supported by adequate wage increases. The 2023 annual wage negotiations reported an impressive average increase of 3.6%, the highest since 1993. However, nominal monthly average cash earnings grew modestly, up only 1.2% year over year in 2023. This trend reflects several factors: smaller wage increases at small enterprises compared with large ones, a faster increase in part-time workers compared with full-time workers, and a decline in nonscheduled hours worked. Since April 2022, real monthly average cash earnings have consistently declined, suppressing private consumption, despite a recovery in demand for services following the easing of COVID-19 containment measures.
According to the Bank of Japan's latest forecasts, it anticipates the country’s underlying inflation will reach a level generally consistent with its 2% inflation target in the second half of its projected period, which is the third quarter of 2025 to the first quarter of 2027. This reflects its projection that the output gap will improve and long-term inflation expectations will rise in line with further strengthening for a virtuous cycle between wages and prices. Bank Governor Kazuo Ueda expects the policy rate to rise to the neutral rate of interest by the end of its forecast period.
As progress on inflation continues in the eurozone, the European Central Bank has begun to ease policy despite multiple factors influencing interest rates. Headline inflation in the eurozone has decreased, alongside a decline in core inflation. Looking ahead to 2024, we anticipate further decreases in core inflation. This is likely due to a slowdown in nominal wage increases and a moderation in firm profit margins.
The path of monetary policy post-June 2024 appears increasingly uncertain, with the ECB adopting a data-dependent approach on a meeting-by-meeting basis. Policy rates are set to remain sufficiently restrictive as needed. Our latest update suggests the ECB may reduce rates by 75 basis points in 2024 (down from 100 basis points in April), followed by cuts of 125 basis points in 2025 and an additional 50 basis points in 2026.
Uncertainty is partly attributed to persistent service price inflation. We anticipate moderation in service price increases throughout 2024 and into 2025. However, robust labor market conditions pose a risk of sustained high service price inflation in the latter half of 2024. If service prices do not moderate, the disinflationary trend in both headline and core inflation could stall. This risk is particularly acute between April and July, as higher oil prices compared with 2023 levels are expected to elevate energy price inflation, even absent further escalations in Middle Eastern conflicts.
We anticipate that lower interest rates will begin to support economic activity, but not until late 2024. Initially, the impact may be modest, especially as some borrowers will still face higher rates when refinancing loans taken out before rate increases began.
Market expectations of upcoming rate cuts have already decreased interbank lending rates (Euribor), which serve as a benchmark for short-term commercial loans. This decline has lowered borrowing costs, particularly for mortgages. However, interest rates on bank loans to nonfinancial corporations, which rose significantly with ECB rate hikes, will take longer to adjust to lower policy rates. Nonetheless, corporate spreads are already narrowing due to reduced rate expectations and some economic improvement.
Lower policy rates will also translate into reduced deposit rates for households and firms. Despite being an important transmission channel, deposit rates have not reacted as strongly to higher policy rates since 2022, which may limit the impact of expected declines.
Furthermore, the outcome of several key elections, including those for the European Parliament, will critically shape the progress of the European Green Deal and associated regulatory frameworks. The trajectory of environmental policies hangs in the balance, poised to influence regional sustainability agendas and global climate action efforts.
The convergence of economic, political, and environmental factors underscores the complexity of navigating today's interconnected world. As stakeholders grapple with uncertainties and shifting dynamics, strategic foresight and adaptive policymaking remain imperative in creating a more resilient and sustainable future.
Global economic trends - political shifts
In 2024, the global economic outlook remains marked by a blend of challenges and opportunities. Critical indicators highlight potential risks and emerging trends that could significantly impact global markets and economies. Foremost among these indicators are the trajectories of mainland China’s economic recovery and Japan’s impending normalization of monetary policy. These factors alone could reshape the global economic outlook.
Alongside these pivotal shifts, key elections are taking place worldwide, including in regions already facing economic instability. In South Asia, for instance, fiscal recovery for nations such as Bangladesh, Pakistan and Sri Lanka are contingent upon International Monetary Fund assistance, with the success of crucial government economic reforms likely determined by electoral outcomes.
In the Asia-Pacific region, the anticipated appreciation of select currencies against the US dollar in 2024 hints at evolving trade dynamics. Relocations from mainland China to emerging manufacturing hubs like India and Southeast Asia drive wage growth but are tempered by challenges in skill availability. Elections in Bangladesh, Pakistan and Sri Lanka further exacerbate policy instability and civil unrest, underscoring the need for robust economic policies.
Forecasts predict accelerated real GDP growth in sub-Saharan Africa, a region on the brink of significant transformation. Structural changes in major economies such as Nigeria and South Africa, coupled with lower inflation and interest rates, could fuel expansion in economic activity. However, restricted access to international funds underscores the region’s growing reliance on innovative financing mechanisms, including debt-for-nature swaps and green bonds, to foster sustainable development projects.
Challenges persist. Debt negotiations under the G20 Common Framework for countries in debt distress, including Ethiopia, Ghana and Zambia, are projected to remain protracted and complex. Meanwhile, security concerns and political instability in Africa’s Sahel region threaten to exacerbate existing vulnerabilities, highlighting the need for coordinated efforts to address underlying socioeconomic issues.
The May 2024 South African elections occurred amid operational disruptions, fiscal challenges and political realignments. The ruling African National Congress lost its parliamentary majority, underscoring the importance of stable governance in times of economic uncertainty.
Green Rules scenario
S&P Global Commodity Insights’ Green Rules scenario portrays a world in which leaders and governments in key markets are compelled to take momentous steps to address threats to energy, public health, economic well-being, and climate security. The impetus behind this is a mix of fear, exasperation, and political backlash by the public (citizens, voters, consumers), who are demanding action from their leaders in response to the seemingly endless crises of the early 2020s. The desire for constructive change is particularly strong considering the acute geopolitical threat posed by the war in Ukraine and the economic impact of yet another instance of energy (first oil, then natural gas) being used as a geopolitical “weapon.”
In the Green Rules scenario, it is not newfound altruism but a fundamental self-interest in improving global stability and national security that drives action. This is directly linked to reducing dependence on fossil fuels and volatile energy commodity markets while rejuvenating national economies to compete in a clean-technology-driven global economy. Ongoing concerns over climate change and ambitions to mitigate it remain strong and are supported, even supercharged, by these new political and economic forces. The result is a world where a revolutionary change in energy use, supply and emissions takes place.