Listen: The Decisive | Episode 23 - The Global Economy: Region by Region

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Kristen Hallam

Hello, this is Kristen Hallam, producer of The Decisive Podcast. In this week's episode, we bring you an excerpt from our client webinar on the global macroeconomic outlook. The webinar was recorded on Oct. 8 and has been edited for brevity and clarity.

Ken Wattret  

Hello, everybody. We really appreciate you taking the time to join us today. I'm Ken Wattret, Vice President, Global Economics here at S&P Global Market Intelligence, and I'll be your moderator. Let me start by introducing today's great lineup of economists from around the globe. Joining us, we have Pat Newport, our Co-Head of U.S. Economics; Diego Iscaro, the Head of European Economics; Andy Birch, Associate Director for Emerging European Economics; Hanna Luchnikava-Schorsch, Head of Asia Pacific Economics; and Paula Diosquez-Rice, Associate Director for Latin American Economics.

I'd like to begin the session by revisiting three key related macroeconomic themes. Our base case for the global economy continues to be centered on gradually moderating inflation, more widespread easing of monetary policy and consistent with those two, a soft landing. Of course, there are numerous risks surrounding these projections, and we'll touch on some of those, beginning with inflation. While oil prices have risen recently and clearly have the capacity to markedly alter the outlook, they remain well below their peaks earlier this year. And furthermore, the ongoing moderation in underlying inflationary pressures has continued. According to our estimates, the CPI inflation rate for core goods, which we calculate and track for the G5 group of economies has been negative for five months in a row now. Although it does look to be bottoming out, various indicators, including our own Purchasing Managers Indices, they suggest that it's likely to remain subdued over the coming months. The equivalent rate for services inflation, meanwhile, that's been more elevated, but that too has continued to decline. It fell in July and August to its lowest level since early 2022.

Switching to monetary policy: The Fed started its long-awaited easing cycle, cutting rates by 50 basis points. That was a bigger move than we had expected and was accompanied by rather dovish communication. Consistent with this, rate cuts are becoming more widespread elsewhere. And as more accommodative financial conditions gradually filter through, this is expected to provide support to economic activity in 2025 and 2026. Now this being said, with futures markets already discounting a stream of policy rate cuts from all the major central banks, a lot of the good news has already been factored into the financial markets.

Now the combination of moderating inflation and looser monetary policy support our base case of a soft landing for the global economy. However, we do think a somewhat softer patch for global growth has become more likely over the second half of this year, given the recent signals of renewed weakness in manufacturing and global trade. And we see that in various areas, but it's most vividly illustrated by our PMI figures for the manufacturing sector. Output, new orders and employment indexes, they've all been in contraction territory over the last few months. And the more widespread and persistent weakness in manufacturing, the higher the risk of more significant spillovers to other areas.

Now that said, the sensitivity of economies to the manufacturing sector has been declining, and it varies considerably at national level. For the U.S. and U.K., for example, manufacturing represents a relatively small share of total output, just 10%. In Germany, in contrast, it's significantly higher, contributing to our more gloomy forecast for the period ahead, which we'll come to in a short while. And that's a nice segue into a closer look at our country-level forecasts beginning with the U.S. I'll bring Pat in at this point. Hello, Pat. It's been a long time now we've been discussing whether the U.S. will be in a recession or is headed for a soft landing. We've been very much in the soft-landing camp. How have recent developments been evolving? Are they reinforcing our sense that a soft landing is the most likely scenario?

Pat Newport  

A soft landing scenario is more likely now than it was 2 weeks ago because of data that has come out, showing that the U.S. economy has performed better than previously thought, particularly this year. One data report were the revisions to the national income accounts. These revisions cover 2019 through the first half of 2024 and include revisions to national income and to GDP. These are 2 ways of measuring economic activity. National income adds up wages, profits, rents and interest and GDP adds up consumer spending, investment, net exports and government. And in theory, both of them should tell similar stories, and they are now because of upward revisions, both to GDP, but more important to national income. The income and the good sides both now show the economy heading into the second half of 2024 with greater momentum and stronger productivity growth than the data showed last month. So that's good news. Inflation has come down faster than anticipated. And in fact, if you just look at the last three months of data, we're already at 2%, although we think that's just a temporary blip and the Fed looks at inflation year-over-year, 12-month intervals, not at 3-month intervals. So we're not quite there yet.

The labor market is balanced, but more important, it's solid across many dimensions. Payroll employment is growing at a steady rate. Real wages are rising in line with productivity growth. The labor force participation rate of women is at an all-time high and the participation rate of prime age workers, those 25 to 54, is approaching an all-time high, and the unemployment rate is really low. Not everything is rosy in the labor market. Firms have slowed hiring, and that's why the unemployment rate has risen. And the quit rate has dropped below pre-pandemic levels, and that's not good because it indicates that workers are staying put at their jobs because they can't find better jobs at another company.

So we have been forecasting a soft landing for some time, but the new data suggests that we'll be landing sooner and smoother than we had been anticipating.

Ken Wattret  

An obvious follow-up question: If the momentum in the U.S. economy looks pretty solid, why do we expect it to slow down?

Pat Newport  

There are at least four reasons for this. One of these is the ongoing effects of Fed tightening. So up to now, the high interest rates have mainly been felt in the housing sector, especially home sales. But the high interest rates have also slowed business investment and dampened consumer spending. And as long as the federal funds rate is above its long run equilibrium rate, it's going to suppress growth.

The second reason we expect a slowdown in growth is that the effects of special factors that boosted growth in 2023 and 2024 are fading. Stimulus spending, infrastructure spending, tax credits for buying electric vehicles, tax subsidies for building microchips and battery plants. The effects of these policies are mostly behind us. So going forward, the effects of these policies will fade and, in some cases, be a drag on growth. Now we've also benefited from very strong productivity growth. But going forward, the likelihood is that productivity growth will revert back to trend.

The third reason for the slowdown is that although the dollar has lost ground recently, it's still quite strong. And so it's weighing down on exports. And so we expect net exports to be a drag on growth this year and in 2025.

And the fourth reason that we expect a slowdown is that we don't expect the stock market to continue rolling along as it has recently. The cessation of rapid gains in equity values will weigh in on consumer spending through wealth effects.

Ken Wattret  

Thanks, Pat. So very clear. So soft landing still the base case and slowdown coming in the period ahead. The picture in Continental Europe has been a lot less favorable. And I'd like to bring Diego in at this point and switch to Western Europe. We've seen high-frequency data recently indicating a renewed weakening of underlying growth momentum in Western Europe. What's driving that, Diego?

Diego Iscaro  

Yes, you're right. Recent high-frequency data continues to point to a soft patch in activity in Western Europe. And this trend has been clear in the data since the start of the third quarter. And it can be clearly seen in the latest PMI figures with the Eurozone Composite Index standing in contractionary territory for the first time in 7 months in September. The survey continues to show the manufacturing sector being the main drag on activity as it has been the case in the last couple of years. But the most concerning development in September was a weakening of service sector activity, which has been the main driver of growth in the first half of this year. Outside the Eurozone, the U.K. composite PMI is still outperforming the Euro zones, but also lost some momentum in September as businesses wait for more clarity in terms of fiscal policy coming from the autumn budget.

Now in terms of what's driving the softening, it's a combination of factors. The industrial sector is still being challenged by weak demand and also some more structural constraints on the supply side of the economy, such as still high wholesale energy prices. Monetary policy also remains a drag on growth despite central banks starting to cut rates earlier this year. And finally, elevated geopolitical concerns, for example, due to the situation in the Middle East, are also weighing down on sentiment.

Now I think it's also important to highlight that the different economies in the region are showing different degrees of resilience. For example, the German economy has underperformed during the last two years, partly due to challenges facing its industrial sector, but also due to a relatively more restrictive fiscal stance. And we expect this underperformance to remain in place next year. Now other economies in the Eurozone are performing better, benefiting from strong tourism activity, falling unemployment and also support from EU grants and loans. Spain is a good example of this.

Ken Wattret  

So we asked the question in the context of the U.S. outlook, so I asked the same question with regard to the Eurozone. What's the likelihood that the Eurozone ends up in recession?

Diego Iscaro  

Yes, this is a good question given the latest data. In our October update, we will include a short technical recession in Germany during the third quarter of this year. But at this stage, we think that the risk of a recession in the Eurozone as a whole is relatively low. Now I mentioned some of the headwinds facing the European economies, but there are also factors that we think will help to support activity during the later stages of this year and in 2025. The first one is that improving real wages should help to support household finances. Now improving real wages should help to support private consumption, particularly if labor market conditions remain resilient, which they have been so far.

Easy monetary policy will also eventually provide some support to activity. But something we need to keep in mind is that lower interest rates will not boost activity immediately. So we talk extensively about laxing monetary policy when rates were going up. And the same applies now that central banks are easing their market conditions. Also, when we think about the impact of monetary policy on activity, we need to keep in mind that lower borrowing costs will not help to fix some of the more structural supply side factors weighing down on Western European economies. Those are likely to continue weighing down on activity next year.

Ken Wattret  

Thanks, Diego. So base case, short technical recession in Germany, probably the euro area avoiding going into recession. What are some of the risks related to that scenario? And in particular, what signs should we look out for that would indicate that a broader recession is becoming the base case?

Diego Iscaro  

So when we think about growth forecast, so we currently assess that risks are mainly on the downside. Now some of these risks are more of a global nature, including an escalation of the situation in the Middle East, which would impact Western Europe, not only through a potential increase in oil prices, but also depressing sentiment across the region.

And another external source of risk is a further increase in global protectionism, which will be particularly harmful on the more open economies in the region, such as Germany. Other sources of risk are more of domestic nature and something we need to keep a close eye on is the impact of fiscal policy on activity. The pandemic led to a large deterioration in fiscal metrics and with the EU fiscal rules being reinstated for the first time since the start of the pandemic next year, the fiscal stance across the region will be more contractionary, and this will offset some of the positive impact coming from easing monetary policy. And this also applies to the U.K., which is outside the EU, but fiscal policy is also expected to be significantly tighter in 2025.

Another area which we will be following closely is the evolution of household saving rates, which have remained high, particularly when compared to the U.S. Now in our baseline, we expect some easing of saving rates as interest rates decline, but it is a nonnegligible risk that consumers will remain increasingly reluctant to spend given the very uncertain economic outlook. And although by itself, a higher propensity to save is unlikely to trigger a recession, it will certainly lead to weaker growth that showed in our baseline, but which I would like to highlight, even if we don't project a recession, our baseline still shows quite muted growth across the region.

Ken Wattret  

So the underperformance of Western Europe, we're going to have to live with for a while yet, it seems. Plenty of risks to continue to monitor. So let's head eastwards and move to Emerging Europe with Andy, where growth in the second quarter actually outpaced growth in Western Europe. What's behind that, Andy? And are we expecting that it will continue?

Andy Birch  

Emerging Europe, the countries of Central Europe, they have been outperforming Western Europe for a little while now. And a couple of factors are largely behind that. Several of the independent central banks of the region, including Hungary, Czechia, Poland, began their rate-cutting cycle before the ECB and have been more aggressive in those rate cuts. Along with just the rate cuts, some of the central banks have been more proactive in putting credit growth upwards, especially in Czechia. And so where we're seeing that is we're seeing greater consumption numbers going on in emerging Europe as compared to Western Europe.

Also in the region, fiscal support has been stronger generally across the board. Those are boosting public sector wages, which is also factoring into the higher consumption. Obviously, with public sector investment going, that's boosting the investment growth in the region as well. Some reforms have been clearing the way so that the disbursement of EU development funds have been advancing across the region, and that has also fueled the investment growth.

Now in 2024, we did see a slowdown of quarter-over-quarter growth, but we do continue to expect to see growth beginning to accelerate going forward. And we're going to see growth in emerging Europe, both in Central Europe, but also even further East that will be above Western Europe, both in 2025 and 2026. The reasons behind that are many of the same reasons that have kept growth stronger to date. We're seeing further rate cuts in many of the independent central banks moving forward. Poland will be somewhat of an outlier in this trend as they are facing inflationary pressures, so they will be holding their interest rates a little bit higher. But along with the independent central banks, right, the European Central Bank has begun cutting rates, as Diego just spoke about. And that will help some of those countries in emerging Europe that are within the Eurozone or that have their currencies closely tied to the euro. So now we're getting consumption continuing to grow.

Secondly, again, we're seeing the release of the ECB development funds that has helped growth in the past will gain momentum in the region in the couple of years to come. So that will help keep investment growth as well. One moderating force looking forward is the strong fiscal support that we've seen over the past couple of years will fade in a couple of the countries. We are seeing some tightening trends going on in many of the countries, but there are notable countries that will maintain fairly expansionary fiscal policy, including one of the largest economies in the region, Poland, where high military and social spending will keep the fiscal policy fairly expansionary there, and we don't really expect any tightening there to begin until 2026 or so. In Hungary, there are 2026 elections. So they are not really poised to begin tightening monetary policy. And in Bulgaria, they are facing snap elections that will return likely a fairly weak government that a weak government will not really embark upon fiscal tightening there as well. The trend will generally hold. Consumption investment will push forward growth in the region.

Ken Wattret  

We heard from Diego, and it's clear from the comments that you've been making, it's not one uniform picture within the region. So where do we think the bright spots will be in emerging Europe, growth-wise? And where are the risk areas for the region that we need to be sensitive to?

Andy Birch  

Again, one of the larger economies of the region with Poland, we're expecting one of the stronger growth rates there and one of the larger accelerations there. However, with that growth, that comes with some of the strongest inflationary pressures in the region. So there is a positive and a negative to that expansion there. And that's, again, because that fiscal stimulus is maintaining, and that goes back to what I said about why they are going to be the laggard in cutting their interest rates further.

In Romania, another larger economy of the region in 2024, net exports have been a fairly large drag on headline GDP growth. We expect a positive shift in that coming in 2025, so that we will see growth there accelerate quite sharply. Now the one risk with Romania is some of that is dependent on further disbursement of EU funds. And Romania has had kind of on again, off again ability to make sure those funds flow uninterrupted. So that is a downside risk to that outlook.

Among the smaller economies in the region, Serbian growth will be particularly strong over the next several years on the back of heavy spending centered on the 2027 Belgrade Expo that we are seeing a lot of development of their infrastructure, of industrialization. So a large leap forward going on in Serbia. On the other end, what we're looking at is, as it has been, Estonia has been a laggard with GDP still contracting even in the second quarter. Though as we look forward, Estonian growth follow the trends of the rest of the region. Growing consumption, growing investment will lead to a recovery there. Similarly, in Czechia, among the larger economies in the region, it's been a laggard as far as growth so far. But again, some of those same trends, consumption, investment will drive forward there. But again, because it's been a laggard, that's one reason we continue to bring forward anticipated rate cuts that might stimulate expansion in that country.

Now you asked about the risks and what we're concerned about in the region. And it is what Diego has spoken about, the German recession, the technical recession, the growing problems, risk problems with their manufacturing, that is a cloud over our region and is raising downside risks in our region. Already in 2024, industrial activity is clearly lagging overall GDP performance across the region. Now currently, in our baseline outlook, we are expecting as the German economy recovers in '25 and '26, our region benefits strongly from that recovery. And so that moves up as well. However, if we're looking at expectations waning in Germany, then the expectations in Central European industrial growth wane, and that will eventually start to impinge on our GDP forecast. We're already in the midst of trimming our industrial production forecast. So if those problems continue to develop in Germany, then problems will rise in emerging Europe as well.

Ken Wattret  

So manufacturing does matter still in some parts of the world. We're going to continue to head East. Let's bring in Hanna to talk about APAC, and we'll focus initially on China, where economic growth momentum has been fading since the second quarter despite various stimulus measures. How worried should we be about that, Hanna? And how long do we expect the weakness to last?

Hanna Luchnikava-Schorsch  

Yes, indeed, we have seen that China's economy has been slowing since the second quarter. And then during the third quarter, economic activity continued to lose momentum. We have seen it in various indicators of industrial activity as well as services. And this is being driven primarily by, I would say, three main areas. One of them continues to remain a property sector downturn. We see continuous decline in housing sales. Another one, which is partially related to it is construction sector weakness. And that is also in addition to property sector being driven by very weak government investment despite the various stimulus measures. And also last but not least, related to it is the finance sector, which again, being driven by the property sector, but also and probably even more importantly, by widespread deleveraging that we are seeing across all sectors, including consumer and corporate and government. And on the demand side, clearly, that also translates into weakness on both consumption where consumer sentiment still remains very weak as well as investment, mostly government investment. The local government spending was on target in the first quarter, but then it really lagged behind during the second and third quarter. And this is really what is driving the weakness in domestic economy.

But then what's really interesting is that I would say that at this point, China is at the crossroads in a sense that we have seen the government providing some measures, but the authorities maintained its steadfast stance on reining in debt. And what we are seeing since the monetary policy stimulus by the Central Bank was announced is that this status, that stance on reining in debt might be somewhat weakening with the government appearing to be eager to either relax it or if necessary, even pause. At the same time, the government is maintaining its growth target for the year at about 5%, which means that we are probably looking at more stimulus measures to come. But what we're really looking for in the stimulus is the impact on sentiment, particularly consumer sentiment. And in fact, what we have seen in the last 7 days, which was a long holiday period in China, is that property sales improved a bit and consumption has at least stopped to contract. So there is some impact, which we expect to be boosted by additional fiscal measures with the government should deploy. How that translates to growth and the growth path. We do anticipate that some of the government bonds issued and allocated during the first 9 months of the year will be spent in the fourth quarter of the year, and that should push real GDP to around 5% for the last quarter with growth probably averaging around 4.9%. That's our latest forecast.

Ken Wattret 

And were growth in China to disappoint, what would that mean for the rest of the region?

Hanna Luchnikava-Schorsch

What we have seen and our main assumption for growth in Asia Pacific, excluding China, for this year was the recovery in exports. In fact, we have seen exports supporting economic performance over the first three quarters. But it's also important to note that exports recovery has not been universal, neither across destinations nor across commodities. What we have seen so far is that the economies which are exporters of technology and semiconductors, in particular, have benefited from the tech upcycle and the adoption of artificial intelligence. We have seen very strong merchandise export growth in Hong Kong, Taiwan, South Korea, so high-income technology exporters. At the same time, the economies which are more exposed to commodities exports, including Australia, Malaysia, Indonesia, have seen some mixed performance, where growth recovery has been lagging so far. We have also seen that exports to the U.S. has been very strong, whereas merchandise exports to China have been lagging as well as merchandise exports to the European region. And that means that going forward, the economies which are more exposed to China, where we will see continuous slowdown will probably be most vulnerable.

On the product side, I think another important issue to mention is that even for technology exporters, we are watching very closely of what kind of commodities and technology exports those are. And what we are seeing is that the exporters of technology, which is used or directed primarily for intermediate consumption or production actually are more vulnerable to a slowdown. This is more cyclical in a way. And in the current tech upcycle, we are seeing it being basically not as robust as previously and a lot will really depend on the further adoption of artificial technology. So what we are seeing within the region itself is that again, the economies with both exposures, including South Korea, Hong Kong, but also Malaysia are being the most vulnerable to slowdown next year.

But one thing in addition to that to mention is that growth this year and next year is also being supported by domestic demand. And considering that easing cycle on the monetary policy side is also about to begin – it has already not begun for many economies – that will provide additional impetus to growth and in a way, compensate for some of the slowdown on the export side. One of the bright spots, again, I would mention would be India, where we do see some deceleration of growth from a previously strong expansion of 8.2% last year. But at the same time, government focus on infrastructure investment, both physical and digital, is supporting growth. So that's where we will continue to see strong performance among the large economies within the region and globally.

Ken Wattret  

We'll move to Latin America next, and we'll bring in Paula. And actually, for this region, we're forecasting a pickup in growth in 2025. So we've talked a lot in the session so far about downside risks, but actually in some areas, we are expecting improving economic conditions. What's behind that relative optimism, Paula? Is it mainly down to robust growth in Brazil?

Paula Diosquez-Rice  

Yes, Brazil does make up the biggest share of GDP in the region and is the main contributor for us adjusting our estimates for 2024 growth. Brazil's GDP showed robust growth in the second quarter of this year, and that was following already a relatively robust performance in the first quarter. And so as a result, we had to adjust our Brazil GDP forecast for 2024 from 2.2% to 2.8%. In addition, high frequency data and sentiment indicators in Brazil are showing that the robustness of growth continues in the third quarter. So we have PMI numbers from July through September, showing that manufacturing growth has continued and the service sector has continued to expand robustly. So Brazil is in a robust year now in 2024.

Now our 2025 regional outlook is actually supported by lower interest rates driving investment and private sector consumption in most of the region. Exports are also contributing to this growth, but exports are actually one of the main sources of risk for the region. In our view, Argentina is projected to rebound from a deep recession, and this comes after many macroeconomic policy changes this year. But this rebound is also relative because we expect it to decline this year and only grow 3.2% next year. There's still a lot of uncertainty there. Chile and Colombia have gone through many challenges from 2022 to this year. And we expect that next year, consumption and investment will drive that higher GDP growth. Chile is going through a stronger momentum now, and we expect that one to continue for the next few quarters. In general, the region because they started their monetary policy easing last year when the disinflation process was bringing inflation rates within their target, it has moved forward, and we expect it to continue and that will drive investment.

Ken Wattret  

So we've talked about how the start of the easing cycle from the Fed is opening the door to rates coming down in lots of other places. But in Brazil, we had a rate hike soon after the Fed started to cut rates. For the region as a whole, we're still expecting lower policy rates going into next year?

Paula Diosquez-Rice  

Yes. The region started earlier because we had lower inflation rates and weak demand in 2023. And that gave the space for many central banks, including Brazil, Peru and Chile, to start cutting their rates to a less restrictive monetary stance, but not expansionary. And even the monetary policy in Chile was the most aggressive. And so we do expect it to continue cutting. In general, the regional inflation rate average comes down a lot next year, but this has more to do with Argentina messing up the averages. Basically, Argentina going from a triple-digit annual inflation to a double digit, and that just brings the inflation rate down for the whole region.

But yes, you're right, earlier this year that disinflation process started to decelerate and there was more of a cautionary stance and many of the central banks paused this cutting of the rates. And this situation really is marked by Brazil going the other direction that not only it paused, but now it raised the rates in September. They're in a more cautionary stance because of the robust growth and the economic growth that they are seeing. Still, in the absence of a significant supply shock, we expect that the relative price stability to continue, and this will allow more monetary policy to just keep the cutting. We just had Colombia resume the cutting, and we expect it to continue cutting into next year.

Ken Wattret  

Okay. Thank you very much. Time has caught up with us. We need to bring today's session to a close. Let me end by thanking all of today's speakers. And most of all, thank you all for taking the time to join us. We really appreciate that. Goodbye for now.