As we enter the final quarter of 2024, the Markets 360 team sees a narrow path for central banks to walk, according to their latest Global Outlook report, as only rarely has monetary policy been tightened in response to inflation without translating into a fully-fledged recession. Most of the time, some slack is required when pushing inflation back down to central bank targets. With the economy responding to monetary policy with long lags, and with information about the current state of the economy arriving with delays, central banks’ task is even harder.
❝ Central banks seem to have the uncommon luxury of easing policy with a view to still-decent, albeit unspectacular, growth and labour markets robust enough to weather the odd bump in the road. ❞
Yet, avoiding recession is exactly what the Markets 360 analysts think will happen this time around. Their base case is for a ‘soft landing’ as the US Federal Reserve and other central banks cut rates.
“Central banks seem to have the uncommon luxury of easing policy with a view to still-decent, albeit unspectacular, growth and labour markets robust enough to weather the odd bump in the road,” says Luigi Speranza, Head of Markets 360 and Chief Economist. Markets 360 economists’ base case sees GDP growth at or slightly below trend in most key economies globally, inflation continuing to fall towards central banks’ targets (though stubbornly sticky in places) and policy rates settling at neutral or just above it across both developed and emerging markets.
However, central banks are likely to be cutting it fine. The team considers that the risks to growth have turned more decisively to the downside over the last six months. For example, the US labour market might be deteriorating faster than expected. Risks to the inflation outlook are more two-sided than for growth, and in the absence of a US recession, inflation might prove more persistent than now assumed.
For a number of countries, concerns over fiscal policy and debt sustainability represent another material source of potential market volatility.
Japan is the major exception to the easing mood for central banks, as the team expects the Bank of Japan to continue its gradual tightening course.
With the Fed having started its easing cycle, Markets 360 analysts think markets are switching focus towards November’s US election. In particular, the results of the presidential and congressional races could have important implications for US fiscal policy, perceptions of debt sustainability and import tariffs. Changes to trade and fiscal policy as a result of the US election could bring renewed price pressures.
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