2024 began with cautious optimism that the economic cycle would move into a clearer phase of recovery and growth as inflationary pressures began to ease and interest rate cuts beckoned.
That overall direction of travel is unchanged – but the path back to more 'normal' conditions has proved slower and bumpier than markets anticipated (and governments and central banks had hoped).
In our mid-year review of our Big Picture, we look at how the backdrop has changed in the first six months of the year and what to watch out for in the second half of 2024.
Overview
Key global economies have proved more resilient than feared during 2024.
The risk of serious recessions has faded with growth expected to (slowly) improve during 2024 and 2025. Geopolitical uncertainty – raising the prospect of further shocks to global security, trade or financial markets - remains the biggest downside risk.
Inflation has continued to fall but tight labour markets and strong services inflation have complicated the outlook.
This has delayed the pace and scale of interest rate cuts initially expected by financial markets in 2024.
The big picture direction of travel remains positive as the recovery phase of the economic cycle takes hold.
Global financing conditions are still expected to start to ease at some point in H2 2024 (and into 2025) supporting growth and investor confidence.
The conclusion of the UK election period could now generate a 'certainty dividend' for the UK economy.
The strong parliamentary majority and mandate secured by the incoming Labour Government, who have pledged stability and a pro-business / pro-growth policy programme, could result in a 'certainty dividend' that bolsters consumer, business and inward investor confidence. Alongside anticipated interest rate cuts from the Bank of England, this should improve the UK's growth outlook in H2 2024.
Mid-year dashboard
There is broad consensus that we are moving past peak inflation and peak interest rates. Economies have proved to be more resilient than feared in the face of higher rates and debt servicing costs - and serious recessions seem to have been averted.
Here are the key developments and trends we have seen in the past six months and what to watch in H2 2024.
Geopolitical backdrop
The story so far...
Geopolitical tensions remain elevated and highly unpredictable – though the direct impact on global trade has proved manageable.
Key developments:
- " Russia-Ukraine war remains entrenched. Closer security alignment between Russia and other nations (China; North Korea; Vietnam) is increasing risks of wider conflict.
- " Israel-Hamas conflict has no short-term peace deal in prospect.
- " EU political fragmentation with rise of far-right parties and snap election called in France.
- " US election set for a Trump/Biden re-match.
H2 Outlook
Global tensions are unlikely to subside in the short term with the US election result a focal point in H2.
What to watch:
- " US election outcome. The re-election of Donald Trump could change key aspects of US foreign policy (reduced support for Ukraine) and trade (protectionist US tariffs).
- " Escalation risks in the Russia-Ukraine war.
- " Israel-Hamas ceasefire deal as a potential upside possibility.
Global growth and trade
The story so far...
The threat of damaging recessions in major economies has faded – with general resilience and green shoots for stronger growth ahead.
Key developments:
- Global growth is running at c3% and has proved resilient despite high inflation and interest rates.
- US annualised growth has remained robust at c2.5%.
- The Euro-area moved back into growth in Q1 2024.
- China's growth is now below 5% per year and remains fragile. India continues to be one the strongest performing economies with c7% annualised growth.
H2 Outlook
Gradually improving growth is expected in H2 2024 – absent further geopolitical shocks.
What to watch:
- Interest rate cuts stimulating faster economic recovery.
- Potential escalation in the ongoing US-China-EU trade tensions centred around electric vehicles (EVs) and renewables technology including solar panels.
Equities and financial markets
The story so far...
Positive momentum for financial markets as investors anticipate future interest rate cuts.
Key developments:
- Strong equities performance – underpinned by investor confidence in generative AI tech.
- Moderate upturn in M&A activity in H1 2024 following 2023 slump.
H2 Outlook
The big picture remains positive – though with some nerves that the strength of the 2024 rally might now be due some correction (or at least moderation).
What to watch:
- Improving economic growth and lower interest rates should support equity performance.
- A downside risk would be a cooling in expectations for AI investment returns.
- Improved funding/valuation certainty should support M&A and capital markets activity.
Global inflation....
The story so far...
Inflation is falling ... but tight labour markets and strong services inflation have slowed progress towards the 2% target.
Key developments:
- Falling energy and food prices have reduced inflation down to 3-5% in many major economies – but this remains above the 2% target.
- US CPI inflation fell to 3.3% in May.
- Euro-area inflation has fallen to c2.5% but nudged slightly upwards to 2.6% in the year to May.
H2 Outlook
With central bank interest rates likely to remain 'restrictive' (even with cuts) this should continue to drive inflation back towards target.
What to watch:
- The risk of geopolitical shocks impacting global supply chains and/or energy prices – particularly in the Middle East or through US/China/EU trade tensions.
- Strengthening economic growth feeding back into renewed inflationary pressures – a delicate balancing act for central banks.
...and US/global interest rate policy
The story so far...
Expectations that the US Fed would lead the pack on interest rate cuts have been confounded – with 'higher for longer' interest rates prevailing.
Key developments:
- Expectations of US Fed rate cuts have been deferred and downplayed – with some arguing there may be no cuts in 2024.
- Slower economic conditions in Europe have prompted the first rate cut by the European Central Bank (ECB), with Canada and Switzerland also cutting rates.
H2 Outlook
All eyes are on the US Fed to start its rate cutting cycle in H2 2024, as the central bank with the biggest impact on global market growth and sentiment.
What to watch:
- US Fed meetings coming up in July, September, November and December.
- The longer-term outlook for US/global interest rates (and in turn, debt financing costs) – which few expect to return to the Zero-Interest-Rate-Policy (ZIRP) era.
UK inflation and interest rates
The story so far...
Headline UK CPI inflation fell back to the 2% target in June – and interest rate cuts are getting closer.
Key developments:
- UK CPI inflation returned to 2% target in June – driven principally by a year-on-year fall in energy prices.
- However – services inflation remained over 5%.
- Wage growth has run at c6% in H1 2024 – supported in part by April's rise in the National Living Wage. A positive for real income growth and consumer spending, but unhelpful for inflation.
H2 Outlook
Markets are anticipating two rate cuts and a 0.5% reduction in the Bank Rate by the end of 2024.
What to watch:
- The Bank of England's first move to cut interest rates – which many expect in August.
- The risk of a modest rebound in CPI inflation, anticipated by the Bank of England, which will complicate the rate cut decision.
- Wage growth trends – which could also fuel consumer confidence and spending, pushing up CPI inflation.
- Mortgage and corporate lending rates – which have started to moderate and look set to fall by 1-1.5% over the next 12-18 months.
Hot-off-the-press... UK general election result
Could a 'certainty dividend' tip the UK's economic scales into more positive territory?
The Labour Party's election with a strong parliamentary majority in last week's UK general election marked the close of a particularly challenging chapter for UK politics and business. Since 2016 five different Prime Ministers have worked through the UK's exit from the EU, the Covid-19 pandemic, an energy crisis and the highest levels of inflation experienced in a generation.
This leaves the incoming government with some ominous underlying financial constraints – but there are also some potential upsides that could brighten the outlook during 2024-2025.
The incoming Labour Government will face some familiar constraints...
Tight public finances – with public debt at c100% of GDP and a commitment that debt will be falling by the final year of the OBR's five-year forecasts.
Limited scope for further borrowing.
Limited scope for tax rises – with the tax take already running at c37% of GDP and with a manifesto commitment not to raise corporation tax, income tax, national insurance or VAT.
... but could benefit from an improving economic backdrop and business climate
UK economic growth is recovering – and should be supported by lower inflation and interest rate cuts.
Consumer confidence may be buoyed by political certainty and rising real wage growth.
Pent-up business investment and deal-making held back pre-election (and pre-interest rate cuts) may be released.
Bond markets may be more forgiving of UK borrowing if it is clearly to support long-term investment.
Labour will seek improved EU-UK relations which may ease trade frictions in specific areas.
As bodies such as the Institute for Fiscal Studies have been at pains to point out, a new government will not in itself change the fundamental challenges and difficult trade-offs facing the UK. Finances are constrained; public services are squeezed; and growth remains below the UK's long-term trend.
Optimists argue that Labour take power just as the economic outlook is starting to improve, and that the 'certainty dividend' of a stable government with a strong mandate will see a virtuous circle of rising confidence, investment and growth.
The incoming Prime Minister Keir Starmer has spoken of the need for a 'decade of renewal' – with partnering between the public and private sectors a key feature to drive green energy investment, housing supply, public service delivery and infrastructure projects. Despite the constraints, there will undoubtedly be opportunities ahead for UK businesses and inward investors as the UK embarks on a new chapter.
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