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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
U.N. projects 2.7% growth for World Economy in 2024
The United Nations released a mid-2024 report last week, indicating improved prospects for the global economy compared to its initial January forecast.
It highlighted a brighter outlook in the United States and several major emerging economies like Brazil, India, and Russia.
The report revised the world economy's growth projection to 2.7% for this year, up from the 2.4% forecasted in January, with a further increase to 2.8% in 2025. While a 2.7% growth rate would match that of 2023, it remains below the pre-pandemic 3% growth rate observed in 2020.
Several factors were identified as influencing these projections, including prolonged higher interest rates, challenges in debt repayment, ongoing geopolitical tensions, and climate risks, particularly affecting the world's poorest nations and small island states.
However, the UN's forecast for 2024 is more conservative compared to those of the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD). In mid-April, the IMF anticipated continued growth at 3.2% for both 2024 and 2025, matching the pace seen in 2023. Similarly, the OECD projected growth rates of 3.1% for 2024 and 3.2% for 2025 in early May.
The latest UN estimates suggest a growth rate of 2.3% for the United States in 2024, a notable increase from the 1.4% forecasted earlier in the year, while China's forecasted growth saw a slight uptick from 4.7% to 4.8%.
Despite climate-related risks, the report by the UN Department of Economic and Social Affairs anticipates improved economic growth for small developing island nations, rising from 2.4% in 2023 to 3.3% in 2024, primarily due to a rebound in tourism.
However, there are concerns regarding economic growth in Africa, with projections lowered to 3.3% from the initial 3.5% forecast for 2024. This downgrade is attributed to weak prospects in key economies such as Egypt, Nigeria, and South Africa, as well as the presence of seven African nations facing debt distress and 13 others at high risk of debt distress.
Easing US inflation rates drive forward talk of further interest rate cuts
The pace of price increases in the U.S. showed signs of slowing last month, following a period of higher-than-expected inflation data that had raised concerns about the world's largest economy.
According to the Labor Department, consumer prices rose 3.4% in the 12 months to April, down slightly from 3.5% in the previous month.
The increase in the cost of living was primarily driven by higher rents and petrol costs. However, analysts believe this decline in inflation is unlikely to resolve ongoing debates about the U.S. central bank's interest rate policy. The Federal Reserve has maintained its key interest rate around 5.3% since last July, aiming to use the highest borrowing costs in two decades to alleviate price pressures.
Expectations for imminent rate cuts have been repeatedly postponed since the beginning of the year, as economic growth remains robust and prices continue to rise faster than the Fed's 2% annual target.
A separate report on Wednesday showed retail sales were flat in April compared to March, fueling speculation that the economy might be starting to weaken. This follows warnings from major retailers that shoppers, especially those with lower incomes, are cutting back on spending.
The Labor Department also reported declines in prices for new and used cars, furniture, toys, and airline fares compared to last year. Grocery prices were 1.1% higher than a year ago, with declines in the prices of eggs, milk, cheese, and other dairy products offset by increases in other areas.
Housing costs, driven by rents, rose 5.5% over the year, and costs for car insurance and medical services also climbed. Excluding food and energy, which are more volatile, prices rose 3.6% over the past 12 months, marking the slowest pace since 2021.
UK’s inflation rate verging on drop below the Bank of England’s 2% target
U.K. inflation is on the verge of a significant milestone, with some predicting a sharp drop in April's figures that could bring the headline rate below the Bank of England's 2% target.
This would mark a substantial decrease from the current 3.2% level and could be a critical factor in the decision for a potential interest rate cut in June, according to economists.
The anticipated decline is primarily due to the energy sector, as the regulator reduced the cap on household electricity and gas bills by 12% at the start of April. A sub-2% reading on Wednesday would be the lowest since April 2021, a significant drop from the peak of 11.1% in October 2022, when the U.K. experienced some of the highest price increases among developed economies.
The U.K. has faced various inflationary pressures, such as a persistently tight labour market, a weak currency driving up import costs, and more significant increases in gas bills compared to other countries. A Reuters poll of economists estimates the headline inflation rate slightly higher at 2.1%.
At its May meeting, the Bank of England kept interest rates steady, hinting at a possible summer rate cut but stopping short of committing to one in June, unlike the European Central Bank. BOE Governor Andrew Bailey, noted the latest figures were encouraging, but emphasised that upcoming data, including two consumer price index reports and two sets of wage growth figures, would be crucial before the June 20 meeting which holds key importance for the economic outlook.
BOE Deputy Governor Ben Broadbent mentioned in a Monday speech that if inflation continues to follow forecasts, a rate cut could be possible some time over the summer. As of Tuesday, money market pricing suggested around a 50% chance of a June cut, increasing to 73% by August.
Many economists predict April's inflation rate will be extremely close to the target of 2%, dropping below in May and staying low for most of the year. This is well below the BOE's forecast, which expects the rate to be closer to 3% by year's end.
March's inflation figures showed the core rate, excluding energy, food, alcohol, and tobacco, at 4.2%, and services inflation, a key metric for the BOE, at 6%.
