The US Federal Reserve monetary policy-easing cycle that is about to begin will be mild and slow compared with previous Fed rate-cutting episodes, Fitch Ratings says in its latest Global Economic Outlook report. Services inflation in the US is still too high to be consistent with inflation returning to target on a sustained basis.
Fitch expects world growth in 2024 to be in line with its historical trend at 2.7%, 0.1pp higher than the June 2024 Global Economic Outlook (GEO) forecast. We have revised up the US growth forecast for 2024 to 2.5% from 2.1% in June, and forecasts for the UK, Brazil and Russia have also been revised upwards.
We expect global GDP to slow to 2.5% in 2025 as US growth falls to 1.6% on a fading fiscal impulse and a gradual slowdown in consumption, as household income decelerates. A Fed easing cycle is finally about to begin, but rates will remain restrictive next year and the impact of rate cuts on growth will be small.
“The long-awaited Fed easing cycle is upon us, but the FOMC will be cautious after the inflation challenges of the past few years. The pace of rate cuts will be gentle and monetary easing won’t do much to boost growth next year,” said Brian Coulton, Chief Economist.
We also expect China’s growth to slow next year to 4.5% from 4.8% this year as rapid export growth eases. But eurozone growth should recover to 1.5% in 2025 from 0.8% (unrevised) this year, mainly reflecting the impact of a recovery in real wages on consumption, which has been weak since 2022.
Unemployment is gradually rising in the US and a number of other advanced economies. This mainly reflects a pick-up in labour supply rather than falling labour demand and we do not believe it signals the onset of recession. But labour market conditions are cooling. This is easing pressures on wage inflation, at the margin, giving central banks more confidence to cut interest rates.
Recent data have boosted the Fed’s confidence that disinflation is on track and they have effectively preannounced a rate cut in September. We expect 25bp cuts at the September and December meetings and further cuts of 125bp in 2025 and 75bp in 2026.
These interest rate forecasts – unchanged from June – represent a much less aggressive easing cycle than most prior Fed easing episodes. There is still work to be done in reducing services inflation and the challenges of the past few years will engender caution at the FOMC.
Activity in the eurozone – and in particularly in Germany – has remained sluggish, but a rebound in real household income is on track and the saving ratio is unlikely to rise further. Credit growth has bottomed out and ECB easing will be a tailwind for investment.
The People’s Bank of China (PBOC) cut rates unexpectedly in July amid growing concerns about deflationary pressures. Further cuts are likely soon but credit growth remains at historical lows, loan demand is weak and PBOC base money growth has slowed.
Japan’s reflation is becoming entrenched, giving the Bank of Japan (BOJ) greater confidence to normalise rates. We now expect the BOJ to increase rates to 1% by end-2026.