Optimism is disincentivised for economists. When an economist predicts recession and contraction, they are quickly forgiven when reality exceeds their expectations. No one minds unexpected good news. But when an economist predicts growth and sunny days ahead, anything less than total accuracy is ridiculed. Economics has unfortunately earned its nickname “the dismal science” by being, well, dismal. It’s no wonder that when economists share good news, they mix in dire warnings of impending disaster. Old habits die hard.
It seems possible that the global economy might be doing okay. The forecast for global GDP has been revised upward by S&P Global Market Intelligence to 2.5% from 2.3%. If the economic surprise of 2023 was the persistence of inflation, then that of 2024 has been the persistence of growth in the face of higher interest rates. Forecasts for the US, Canada, the eurozone, the UK and Russia have all been revised upward.
In November, S&P Global Ratings chief economist Paul Gruenwald predicted growth, albeit asynchronised, across major markets. Persistent strength in labor markets was responsible for much of this growth. Consumer spending on services was a strong factor in driving lower unemployment rates since services tend to be labor intensive. The continued strength of labor markets supported the narrative of a soft landing for the global economy, according to Gruenwald.
A soft landing for the global economy would require inflation rates to shrink to target rates of about 2% while GDP maintained growth or at least did not contract too much. Central bankers set higher interest rates to reduce inflation, but there is always the danger that they may be too effective and tip the global economy into recession.
Of course, good economic news always contains the seeds of bad economic news. The stickiness of labor markets and spending on services indicate demand growth that is too strong. This is contributing to the slow decline in inflation rates. When more people are making more money, their demand for goods and services drives up prices. In economies such as Canada and the eurozone, where demand growth has been weaker, inflation rates have come down more quickly.
Part of the reason growth has remained persistent is that markets expect interest rates to fall over the course of 2024. S&P Global Ratings has predicted that any lowering of interest rates by the US Federal Reserve will come in June. However, serious disruptions to global supply chains could cause inflation to spike again and delay rate changes until 2025. At the top of the list of threats to global supply chains are geopolitical disruptions, including the war in Ukraine, the Israel-Hamas war, Houthi attacks in the Red Sea and tensions in the South China Sea. If these disruptions intensify, fewer goods will reach consumers, and prices will climb for what remains.
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