What in the World! June 2024

Global Economy

• Global growth is projected to stabilize at 2.6 percent this year, holding steady for the first time in three years despite flaring geopolitical tensions and high interest rates. It is then expected to edge up to 2.7 percent in 2025-26 amid modest growth in trade and investment.
• Global inflation is projected to moderate—but at a slower clip than previously assumed, averaging 3.5 percent this year. Given continued inflationary pressures, central banks in both advanced economies and emerging market and developing economies (EMDEs) will likely remain cautious in easing monetary policy. As such, average benchmark policy interest rates over the next few years are expected to remain about double the 2000-19 average.

• Global financial conditions have eased, on balance, since last year, primarily reflecting declines in risk premia amid still-elevated interest rates. Central banks across major advanced economies are expected to gradually lower policy rates this year, but the level of real interest rates is set to remain a headwind to economic activity—albeit a diminishing one—for some time. Policy rate projections derived from financial markets have been volatile since U.S. policy tightening started in 2022, with expectations repeatedly revised higher over time. Meanwhile, most advanced-economy central banks continue to emphasize that the pace of easing will be cautious, reflecting persistent inflationary pressures.

• Growth is projected to soften in most EMDE regions in 2024. In East Asia and Pacific, the expected slowdown this year mainly reflects moderating growth in China. Growth in Europe and Central Asia, Latin America and the Caribbean, and South Asia is also set to decelerate amid a slowdown in their largest economies. In contrast, growth is projected to pick up this year in the Middle East and North Africa and Sub-Saharan Africa, albeit less robustly than previously forecast. EMDE growth is projected to moderate from 4.2 percent in 2023 to 4 percent in 2024.

Global Trade

• Global trade in goods and services was nearly flat in 2023—the weakest performance outside of global recessions in the past 50 years. Amid a sharp slowdown in global industrial production, the volume of goods trade contracted for most of 2023 and fell by 1.9 percent for the year as a whole.
• Global trade growth is projected to pick up to 2.5 percent this year, a significant improvement from last year but well below the average rates observed in the two decades preceding the pandemic. Despite the expected growth in trade this year, by the end of 2024 global trade is set to register the slowest half-decade of growth since the 1990s, mirroring subdued global GDP growth.

• EU will impose tariffs of up to almost 50 per cent on Chinese electric vehicles, brushing aside German government warnings that the move risks starting a costly trade war with Beijing. The European Commission notified carmakers on Wednesday that it would provisionally apply additional duties of between 17 and 38 per cent on imported Chinese EVs from next month. The duties will be applied on top of existing 10 per cent tariffs on all Chinese EVs, depending on the extent to which they complied with an EU anti-subsidy investigation into electric carmakers that was announced last September.
• In the near term, the responsiveness of global trade to global output is likely to remain lower than before the pandemic, reflecting muted investment growth and the recent proliferation of trade restrictions worldwide.

United States

• The major indexes ended mostly higher for the week, with the S&P 500 Index and Nasdaq Composite touching new highs. The market’s advance remained exceptionally narrow for the second consecutive week, however, with an equally weighted version of the S&P 500 trailing its more familiar, capitalization-weighted counterpart by 215 basis points (2.15 percentage points).

• Forward P/E ratio is now making a lower high even though the S&P 500 price index is making a higher high
• Relatedly, enthusiasm over the potential of artificial intelligence appeared to provide a continuing tailwind to technology-related stocks and growth shares, which outpaced value stocks by the largest margin since March 2023 (461 basis points), according to Russell indexes.
• Consumer prices have increased 3.3% over the past year compared to 4.0% at this time last year. Similarly, the core CPI has eased to a year-over-year pace of 3.4% versus 5.3% last May. Inflation appears to be back on a downward path after a Q1 spike, but there is still a bit more distance from its desired destination. the May CPI data showed that consumer prices were unchanged in the month, the first flat reading for the CPI since July 2022.
• Households have been under ever-increasing pressure from high interest rates, leaving those that carry a balance on their credit cards or those paying off an auto loan saddled with more personal interest expenses. As the Fed has raised rates at the fastest pace in four decades over the past two years, the interest rates consumers pay on consumer loans have soared.
• Raising concerns about the overall health of the economy—were surprise jumps in weekly and continuing jobless claims. Over the week ended June 8, about 242,000 Americans filed for unemployment, the most in almost a year. Over the previous week, the number of people who had filed at least two weeks of claims hit 1.82 million, the most since the week ended January 20 and the third-highest number over the past year.
• The U.S. labor market continues to defy expectations. Employers added 272K net new jobs in May, which was stronger than even the most bullish forecaster among 77 submissions to the Bloomberg survey. Yet, when you get past that upside surprise in hiring, the data appear less strong.
• Job growth continues to be relatively concentrated. Hiring in the healthcare & social assistance (+83.5K), leisure & hospitality (+42.0K) and government (+43.0K) industries accounted for over 60% of job growth last month and hiring has been concentrated in these less-cyclically-sensitive industries over the past year. Temporary help employment, which has historically led overall hiring, has continued to see outright layoffs.
• There wasn't much surprise that came out of the Federal Open Market Committee's (FOMC) June monetary policy meeting. The Committee elected to keep the target range on the federal funds rate unchanged at 5.25%-5.50%, and while there were some underlying revisions to individual members' economic forecasts, the Summary of Economic Projections (SEP) still showed most participants expect at least some reduction in rates before the year is out.

Europe and Central Asia

• Growth in Europe and Central Asia strengthened to 3.2 percent in 2023, primarily reflecting a shift from contraction to expansion in the Russian Federation and Ukraine, and a more robust recovery in Central Asia. The regional picture was mixed: growth in Türkiye slowed and activity in Central Europe barely expanded, primarily reflecting stagnation in Poland due to falling real incomes, and amid spillovers from euro area weakness. High-frequency economic indicators, including manufacturing purchasing managers’ indexes and retail sales, suggest a resilient activity in early 2024 in ECA’s largest economies—Russia, Türkiye, and Poland.
• Following the earlier lead of its Canadian and European counterparts (Switzerland and Sweden), the European Central Bank (ECB) clipped its key policy rate this week, ploughing a different furrow from the Federal Reserve.?
• The widely telegraphed move by the ECB marked its first cut since September 2019.? Continued disinflation in the eurozone (from a peak of 10.6% in October 2022 to 2.6% in May 2024) was judged by the ECB as enough to begin easing.?
• The 450 basis point increase in ECB policy rates between July 2022 and September 2023 helped bring prices under better control.? Energy and food disinflation have made large contributions to progress, but core price increases have halved from a peak rate of 5.7% year over year to 2.9% at present.? The breadth of inflation is more moderate in the eurozone than elsewhere.?
• European markets started the week on uncertain footing, weighed down by political risk after French President Emmanuel Macron called for snap legislative elections later in June after the European Union elections showed a broad shift toward right-wing and far-right parties.
• The uncertain political environment was also acutely reflected in European bond markets. Government bonds sold off sharply early in the week, with 10-year French and Spanish yields surging to their highest levels this year, before ultimately receding toward the week’s end.
• France's 10-year yield, for example, surged more than 20 basis points from last week’s close, to around 3.34% on Tuesday, as the snap election raised concerns about the country's already fragile public finances. Meanwhile, German bond yields fell, seemingly due to a bid for safety in reaction to the situation in France. Fiscal deficit over 5% during good times France is at risk of facing a Debt crisis whoever wins next elections
• In the United Kingdom, GDP growth paused in April, although the economy appears to still be on a gradual overall upswing. April GDP was flat on the month, following growth of 0.4% in March. Services activity rose 0.2% in April, led by gains in information and communications services, professional and scientific services, and arts, entertainment and recreation.

Asia

• Growth in China is expected to slow this year and ease further in 2025 and 2026, with cyclical headwinds weighing on growth in the near term, along with a continuing structural slowdown Weaker-than-expected growth in China—triggered, for instance, by a more prolonged and deeper property sector downturn—could have notable negative spillovers, particularly for EMDE commodity exporters.

• In Japan, growth is expected to decelerate to 0.7 percent in 2024, due to a feeble expansion in consumption and slowing exports amid normalizing auto production and stabilizing tourism demand. Output is projected to grow at an average rate of 1 percent in 2025 and 0.9 percent in 2026, on slight improvements in consumer spending and capital investments.
• The Bank of Japan (BoJ) offered its latest monetary policy assessment this week and disappointed some market participants by not announcing any new concrete policy measures at this meeting. The BoJ said it would maintain its policy rate, the uncollateralized overnight call rate, in a range of 0.0% to 0.1%, and would conduct Japanese government bond purchases in accordance with decisions made at its March meeting. Japan?sold $17 billion worth of Foreign Debt, the largest sale in 9 years
• India will remain the fastest-growing of the world’s largest economies, although its pace of expansion is expected to moderate. After a high growth rate in FY2023/24, steady growth of 6.7 percent per year, on average, is projected for the three fiscal years beginning in FY2024/25. This moderation is mainly due to a slowdown in investment from a high base. However, investment growth is still expected to be stronger than previously envisaged and remain robust over the forecast period, with strong public investment accompanied by private investment. Private consumption growth is expected to benefit from a recovery of agricultural production and declining inflation. Government consumption is projected to grow only slowly, in line with the government’s aim of reducing current expenditure relative to GDP.

• Indonesia is expected to benefit from a growing middle class and generally prudent economic policies, expanding by an average of 5.1 percent over the next two years.

• Over the forecast horizon, GDP growth in most EAP economies except China—including Indonesia, Malaysia, and the Philippines—will be anchored by solid growth of private consumption supported by low inflation, declining borrowing costs, and firm labor market conditions.

Latin America

• Business confidence has remained positive in Brazil and Mexico, and has improved in Colombia, and recovered in Argentina after deteriorating strongly in the first months of the year.
• Over the past 12 months, Brazil and Chile have cut rates the most, while Colombia and Peru have reduced rates to a lesser degree. Mexico’s central bank initiated rate cuts later than its regional peers and has reduced its policy rate more cautiously, by 0.25 percentage point.
• Growth in LAC is projected to weaken further, to 1.8 percent in 2024 due to elevated real interest rates in 2023 and weak trade growth in 2024. Growth is expected to pick up to 2.7 percent in 2025 as interest rates normalize alongside lower inflation. Growth for 2024 has been revised down by 0.5 percentage point since January, mainly because of reduced regional exports and a marked deterioration in the near-term outlook for Argentina, where fiscal and monetary policy steps needed to address chronic imbalances are expected to cause a temporary contraction.
• Latin American financial markets, particularly currency markets, came under pressure. We can point to the election surprise in Mexico as the originator of regional market volatility; however, additional policy uncertainty in countries such as Brazil and Colombia also contributed to new volatility in local markets. As far as Mexico, the peso continues to be volatile and experience sporadic bouts of depreciation pressure. Volatility stems from the Morena party and its allies outperforming and securing an effective supermajority in both houses of Congress.
• Fiscal policy was the catalyst for selloffs in the Brazilian real and Colombian peso this week.

Middle East and Africa

• Geopolitical tensions and policy uncertainty are elevated in Middle East. Human suffering and the destruction of physical capital in West Bank and Gaza arising from the conflict in the Middle East centered in Gaza are immense. The conflict has led to wider regional repercussions, involving the Islamic Republic of Iran, Lebanon, and the Syrian Arab Republic. Attacks on shipping in the Red Sea by Houthi rebels in the Republic of Yemen have reduced transit through the Suez Canal, disrupted international trade, and heightened policy uncertainty, particularly in neighboring countries
• Growth in the region’s three largest economies (Angola, Nigeria, South Africa) remained weak, holding back growth in the region. In early 2024, private sector activity picked up alongside a strengthening global economy. At the same time, many economies in the region continue to struggle with weak government balance sheets, stemming partly from low revenue collection and high debt-service costs, while some also need to manage the adverse effects of currency depreciations. Growth in the region’s three largest economies is expected to accelerate from 1.8 percent in 2023 to 2.4 percent in 2024 and an average of 2.6 percent in 2025-26.

Commodities

• The overall outlook for commodities has brightened since the start of the year supported by a global economy that has turned in a more resilient showing than anticipated.? Prices across the complex should receive a tailwind in the coming quarters from lower interest rates, solid demand, and ongoing supply constraints.
• Idiosyncratic factors are driving divergences in energy markets. OPEC countries have demonstrated their willingness to maintain a floor under crude prices, while weather-related anomalies spurred a hasty decline in natural gas prices. Such a wide gap in price conditions is not typically sustained for long, with gas likely to play some catch up in the quarters ahead.? ?
• Gold has outperformed most of the commodities complex year-to-date. The bullish outlook reflects continued robust demand, especially from central banks, and expectations for interest rate cuts and lower yields. Silver’s strong positive correlation to gold lends support to prices.
• Industrial metals are being supported by ongoing supply concerns, firming demand, and improved overall sentiment. Copper markets appear most vulnerable to being undersupplied, while strong demand for nickel is being offset by rising Indonesian output.
• Lumber prices are still subdued as higher-for-longer interest rates are weighing on homebuilding activity. Even as housing markets and overall demand slowly recover in the second half of this year, restrictive monetary policy will limit the upside.
• Agricultural commodities are moving higher in Q2-24 after bottoming out last quarter. Wheat markets are being driven up by renewed fears of supply shortages from weather events and geopolitical risks. Meanwhile, increasing canola demand is facing off against a more uncertain global supply picture.
• Livestock prices have moved in lockstep to start the year, with cattle and hog prices marching higher. Both commodities are experiencing inventory shortages with seasonal consumption patterns likely offering a near-term lift to prices.
• After reaching a nearly 30-year low in March, the price of U.S. natural gas surged in May, in part due to increased liquefied natural gas (LNG) exports. U.S. natural gas prices are expected to stabilize in the near term, before increasing further in 2025 as gas liquefaction capacity expands, allowing more supplies to be diverted to other market
• In the second quarter, copper prices rose to a record nominal high on supply concerns, while benchmark aluminum prices spiked after the introduction of new sanctions on the Russian Federation. Metals prices, excluding those of precious metals, are projected to remain little changed, on average, in 2024-25, staying well above pre-pandemic levels.
• Weaker metals demand associated with lower real estate investment in China is likely to be substantially counterbalanced by firming global industrial demand and metals-intensive clean energy investments

Risks

• Global outlook continue to be tilted to the downside amid heightened uncertainty. Worsening conflicts or escalating geopolitical tensions could have adverse impacts on global growth through commodity markets, trade, and financial linkages. Further trade fragmentation amid resurgent inward-looking industrial policies carries the risk of additional disruptions to trade networks, supply chains, and economic activity.
• Elections during 2024 may see populists across the globe gain ground and shift policies away from free trade and pro-market reforms, potentially contributing to market volatility. Markets could respond negatively to an outlook of rising tariffs and trade frictions that might potentially boost inflation and weigh on exports. Global voters are expressing frustration about many issues but notably the rising cost of living. Yet we see many incumbent leaders or challengers constrained in any response, notably due to high public debt somewhat tying their hands.
• Market volatility is picking up, and credit spreads are widening across Europe due to the unexpected snap elections in France. The uncertainty around the outcomes of right-wing and left-wing leaning parties is resulting in the spread of French and German bonds to widen dramatically. This is having a ripple effect across markets. Investors are worried France could be facing a financial crisis if the political center collapses in upcoming parliamentary elections, leaving far-right populists in charge of the European Union’s second-biggest economy.
• The 50-year-old petrodollar agreement between the U.S. and Saudi Arabia expired on June 9, 2024. This expiration has far-reaching implications, as it has the potential to disrupt the global financial order.? The shifting power dynamics in the oil market are a critical factor in this development. The rise of alternative energy sources, such as renewables and natural gas, has reduced the world’s reliance on oil. Furthermore, the emergence of new oil-producing nations, such as Brazil and Canada, has challenged the traditional dominance of the Middle East.?
• Stubbornly elevated core inflation in advanced economies could forestall anticipated monetary easing, tightening financial conditions, including in EMDEs, and weighing on global growth.
• Weaker-than-expected growth in China could have negative global spillovers through commodity markets and trade channels.
• Severe climate-change-related natural disasters could result in considerable losses in lives, livelihoods, and output. Such events could also cause spikes in food prices, stalling or even reversing the decline in global inflation and exacerbating food insecurity.