Global Navigator from KPMG Economics

• Most major central banks are cutting rates. The Federal Reserve (Fed) is expected to join the Bank of England, Bank of Canada, the European Central Bank (ECB) and many emerging market central banks in rate cuts in September. The Bank of Japan is the outlier, although it is unclear how many cuts the ECB will be able to make, given signs of service sector inflation. 
• The financial market volatilitymay return. The instability we saw in early August quickly faded, but earlier rate hikes are still acting as a drag on growth so another stock market rout cannot be ruled out. Governor Kazuo Ueda of the Bank of Japan warned that financial markets remained unstable in his comments to the Japanese Parliament on August 23. 
• Asia weakens. Asia is expected to place a larger drag on global growth than previously forecast. That marks a major shift from where conditions were prior to the pandemic. India is poised to hold up better than China but can’t match the country’s role in swinging the pendulum on global growth.  

Global growth is forecast to decelerate from 3.1% average annual growth in 2023 to 2.9% in 2024 before edging higher to 3% in 2025 and 3.2% in 2026. Growth in Asia has been marked down to reflect ongoing weakness in the region’s largest economies, Japan and China. Emerging Asia is expected to perform better. 

Inflation is likely to cool and return to target across much of the world, which opens the door to more aggressive rate cuts. Those shifts assume that trade wars will not escalate dramatically and that we avoid a full-blown trade war and the higher inflation that would no doubt accompany such a shift in events. The war in the Middle East could remain contained with hopes of a ceasefire on the horizon. 

Asia is poised to slow from nearly 5% growth in 2023 to 4.4% in 2024 and 4.3% in 2025 and 4.4% in 2026. Weak output from China and Japan’s struggle with inflation is the primary reason for the slowdown. The Bank of Japan has hiked rates in response to higher price levels. Demographics have shifted for much of the region, which is aging. Some countries have already suffered a loss in population.

Semiconductor production in Taiwan is booming. Over the last 10 years, the share of industrial production devoted to semiconductors has increased by 10 percentage points. Not only has the share of industrial production devoted to semiconductors increased, but Taiwan reached its 2019 year-end level of semiconductor exports in the first few days of May this year. Strong export growth is forecast to support the economy. AI will be a boon.

India is predicted to slow from last year’s breakneck pace. A nearly 9% growth rate is hard to maintain, especially as high interest rates create drag. The country is expected to surpass Germany and Japan to become the world’s third-largest economy by 2030. India’s younger demographics compared to many other parts of the world are a booster, but bureaucratic red tape and climate change pose major hurdles to replacing China as the engine of global growth. 

Unexpected turnover among Vietnam’s top levels of leadership and the death of the government’s general secretary are likely to bring short-term uncertainty. The country has a reputation for stability among investors. 

Europe, including the eurozone and Eastern Europe, is forecast to move up from 1.3% growth in 2023 to 1.6% in 2024, 1.7% in 2025 and 1.8% in 2026. The eurozone is forecast to fare worse than Eastern Europe with growth diverging by more than a percentage point between the two blocs. Wage growth across the region is still nearly 5%, making inflation a hurdle that should dissipate by 2026. It is higher in Germany as negotiated contracts earlier in the year pushed up inflation-adjusted wages at the fastest pace since the data started being collected in 2000. The ECB has emphasized that the surge reflects a catch-up to earlier inflation but has grown more cautious on rate cuts as the summer has worn on. 

Germany is the worst performing Eurozone economy as the economy struggles. Wage gains are outpacing inflation, which could add to consumer spending, but the industrial sector continues to struggle. A massive influx of tourism has helped buoy economies such as Greece, Italy and Spain. The backlash to the level of tourism has intensified among the public in recent months. 

Across most of Eastern Europe, inflation is approaching or has reached various central bank targets; real wage growth is boosting consumption. Poland and Hungary are likely to hold rates flat through the end of year, while Romania and Czechia may cut sooner. The war in Ukraine has escalated in recent months, with more widespread devastation of property and the energy grid. 

The Middle East and Africa are expected to accelerate from 1.6% in 2023 to 2% in 2024, 3.9% in 2025 and 4% in 2026. Inflation has already decreased substantially from its peak and is expected to hit its pre-pandemic lows in 2026. Global demand for carbon fuels remains strong and is getting a boost from generative artificial intelligence (GenAI) and the need to curate and store data to train large language models. Tech behemoths around the world are focused on boosting the energy efficiency of GenAI models and investing more in renewables and next-generation nuclear technologies to reduce energy costs and carbon footprints. The fruits of those investments are still years away. A surge in extreme weather events is further stressing antiquated energy grids. 

A ceasefire in Gaza is no guarantee of a larger peace accord, but such a development could ease disruptions to shipping. The US has increased its military presence in the region as a deterrent. Any resolution to the conflict could alleviate the upward pressure on shipping costs seen as freighters were rerouted to avoid the Suez Canal.

North American growth is expected to slow from 2.5% in 2023 to 2.3% in 2024 and 1.8% in 2025 before rebounding to 2.2% in 2026. The US continues to beat expectations, with the consumer holding up, despite the bite of higher rates. Rate cuts by the Fed should provide a tailwind for growth in the region in late 2025 and 2026. Fiscal policy is the largest hurdle, as many of the tax cuts enacted in late 2017 are slated to expire in the US in 2025; it is unclear how many cuts will be extended, regardless of who wins in November. 

Canada’s growth has stalled in response to higher rates but should rebound in 2025 and 2026. Many homeowners have adjustable-rate mortgages and many of those mortgages repriced in 2024, prior to a cut in rates by the Bank of Canada. Curbs on immigration are another hurdle that will expose the country’s aging demographics and lackluster productivity growth. The country is well-positioned to leverage GenAI, but the returns on those investments will take years not months to reverse the dismal productivity growth the country is suffering.

Mexico’s output growth is forecast to slow to in 2024 and 2025 and bounce back in 2026. Following national elections in June, the peso and equity markets sold off on concerns about future economic policy. Services inflation, especially shelter costs, in the country and region remain elevated while food prices are still a drag on household finances. The central bank cut rates a second time in early August to address the economic slowdown and may have more room to cut given the shift in the Fed’s policy, though it will likely be at a relatively slow pace.

Growth in South America is forecast to slow from 1.5% in 2023 to 1.2% in 2024 and rebound to 2.3% in 2025 and 2.9% in 2026. High interest rates are a hurdle and limit fiscal stimulus; recent depreciations in currencies have spurred hawkishness at central banks. Most central banks in the region have slowed or even paused their easing cycles in the face of “higher-for-longer” from the Fed and weak currencies. The beginning of the Fed’s easing cycle should offer some breathing room. 

The disputed election in Venezuela will have limited effects on the broader region’s outlook, but the administration’s lack of constructive policy will curtail domestic prospects. Things could get worse if sanctions are tightened or raised on oil exports. 

Argentina has embarked on a unique period of fiscal consolidation, which triggered a rapid and deep recession. The economy is bottoming out in response to lower inflation and interest rates but is still a work in progress. Brazilian inflation has been heading higher since April; an about-face from rate cuts over the last year is not off the table for Brazil’s central bank. 

Commodity prices have supported Peru and Chile’s expansions in 2024 following a disappointing 2023. Copper is one of the largest exports from the Andean economies and will retain its high demand as chips and green tech products grow in importance. Gold, the second largest export from Peru, makes a nice hedge.  

Any external shocks, including a disruption to oil supply, could undo progress made on inflation and force central banks to pause or reverse course on rate cuts. Add softening labor market conditions and risks of recession have moved up, notably in the US. That could rapidly ripple across the world.  

Separately, the United States-Mexico-Canada Agreement is due to be renegotiated in 2026. If no deal is reached, then a sunset clause is triggered to phase out the current accord by 2036. This would be detrimental to both trade and the broader relationship between the North American neighbors.

Lastly, ongoing conflicts in Europe and the Middle East and potential geopolitical flashpoints in Asia could accelerate fragmentation and prompt a more rapid reshuffling of supply chains. The goal is to hedge political risk with more costly supply chains in countries with friendlier relations.

The global economy is showing the stress of earlier inflation and rate hikes. Several central banks have begun to cut rates with the Bank of Japan being a notable exception. Even the Fed now appears poised to cut, which opens the door to more rate cuts abroad. Those shifts can’t come soon enough for many countries that have struggled, despite avoiding full-fledged recessions.