Global Economic Outlook

A slower expected glide path on rate cuts by the U.S. Federal Reserve, which plays an outsized role in global financial markets, will have a larger impact on rate decisions by developing economies. These markets are more sensitive to the exchange rate movements than we have seen in the past. Weakening currencies relative to the U.S. dollar are inflationary for those economies. To further complicate matters, foreign exchange markets have been reacting to unexpected election outcomes.

Between interest rate uncertainty and the elections, business leaders remain hesitant to engage in major investment projects. Consumers are cutting back on financed goods due to elevated rates, while governments face higher financing costs as debt rolls over at higher interest rates.

Friend-shoring, re-shoring and near-shoring are reshuffling supply chains as producers hedge against geopolitical risk, often at higher costs. The conflict in the Middle East has caused seaborne trade to be rerouted, while higher-than-expected demand and weather have also increased shipping costs. The National Atmospheric and Oceanic Administration expects a record number of major storms for 2024, which will only add to shipping times and snarled travel.

Prospects for 2025 are better, with inflation expected to return towards target and central banks more confident to cut policy rates from the current restrictive levels. The silver lining is a tailwind for big-ticket consumer purchases and business investment. Mergers and acquisitions activity could also gather steam, as financial conditions ease and dry powder is deployed. However, the uncertainty remains around the policy shifts, which will likely fuel more insular and protectionist policies.

The much-vaunted productivity boost from generative artificial intelligence (GenAI) is unlikely to appear at the global level for several years. One of the largest hurdles is the energy needed to run the large language models. Those costs could exacerbate inequality between the developed and developing economies. While advances in AI could also disrupt the labor markets during the transition period, our forecast is nonetheless consistent with a broadly stable unemployment rate globally.