Despite ongoing geopolitical turbulence, the global economic picture has remained relatively stable on the surface. However, beneath the aggregate figures lies a landscape of stark contrasts across nations. The modest improvement in the 2024 global forecast is primarily driven by the United States, supported by smaller contributions from economies such as the U.K. and Canada, along with selective upgrades in emerging markets. In contrast, previously strong performers like China and Germany are now lagging. A shared trend among central banks globally is the growing consensus that inflation is coming under control (Chart 1), paving the way for monetary easing.\n\nGermany continues to grapple with the aftermath of the 2022 energy crisis. Price increases for consumers and producers outpaced those in the broader eurozone, and sentiment among households and businesses remains subdued. The economy contracted in the second quarter and faces the risk of another decline in the third, potentially tipping into a technical recession. Across the English Channel, the U.K. has exceeded expectations in the first half of the year, showing stronger resilience.\n\nChina’s initial momentum in 2024 faltered under the strain of a shrinking property market and weak consumer spending. The economy now shows signs of deflationary pressure. There is a growing likelihood that Beijing will fall short of its official growth target, as current stimulus efforts have failed to restore confidence among households and firms.\n\nThis slowdown has reverberated through commodity markets. Worries over weaker Chinese demand have sent crude oil prices tumbling by more than $10 per barrel in just over two weeks, even as OPEC+ delayed planned production hikes. As a result, near-term oil price projections have been revised downward. While this drop benefits central banks navigating rate cuts by reducing headline inflation, it may only offer temporary relief. Looking ahead to next year, oil prices are expected to average $77 per barrel, supported by lower borrowing costs boosting demand and OPEC+’s cautious supply management.\n\nIs the U.S. experiencing a rare ‘just right’ economic scenario?\n\nRecent developments in the American economy resemble an ideal narrative: growth has moderated but not collapsed. Economic expansion remains slightly above 2%, aligning with long-term trend levels. The labor market has rebalanced (Chart 2), and inflation is on a clear downward path toward the 2% objective. The Federal Reserve now feels confident enough to reduce interest rates without reigniting excessive economic activity. After years of volatility, this balanced outcome feels almost too favorable to be sustainable.\n\nDiving deeper, 2024 growth projections have been slightly raised to 2.6%, though a gradual deceleration toward 2% is expected by year-end. A similar pace is anticipated in 2025, with lower borrowing costs helping sustain demand. Consumer spending has held up well, but challenges loom, including the depletion of pandemic-era savings and rising delinquency rates across credit types. High interest rates continue to weigh on households, especially as job market tightness eases to pre-pandemic norms. Housing demand is also expected to recover next year, following a period of strained affordability.\n\nBusiness investment has outperformed expectations, though momentum may wane. The second quarter benefited from volatile aircraft orders, which often lead to pullbacks in subsequent periods. Even if this boost fades, it is unlikely to derail the sector entirely. The transportation segment still has room to grow as financing becomes cheaper. Fleet investment—covering trucks, trailers, and light vehicles—remains 25% below pre-pandemic levels due to earlier supply constraints. While overall business spending is expected to ease modestly in line with the broader economy, the ongoing rate cuts should cushion the decline.\n\nAs the presidential election approaches, the economy appears robust, but fiscal policy remains uncertain. The baseline scenario assumes a slowdown in government expenditure, particularly under a divided Congress, which historically limits large-scale fiscal initiatives. State and local spending, elevated during the pandemic, is also expected to taper, though infrastructure investment will continue to provide support. Current projections assume no changes to tax policy, as governments typically avoid triggering sunset provisions through legislative compromises. This is critical for personal income tax rules set to expire at the end of 2025 under the 2017 TCJA. If Vice President Harris wins the presidency, adjustments to individual tax rates could occur, potentially reducing 2026 growth by 20 to 30 basis points depending on the scope of reforms and congressional negotiations.\n\nFinancial markets align with the expectation of a prolonged easing cycle in the federal funds rate. The Fed made a decisive move with a 50-basis-point cut in its first reduction, justified by inflation falling to around 2.6% and the real policy rate being unusually tight—approximately 300 basis points above its two-decade average. With the central bank signaling readiness to act decisively, another 50-basis-point cut is anticipated in November, followed by more gradual 25-basis-point reductions at subsequent meetings. As Chair Powell noted, the pace remains data-dependent and not on a predetermined path. Adjusting monetary policy is more nuanced than formulaic. Nonetheless, the ultimate target remains a neutral rate of 3%.\n— news from TD Economics\n\n— News Original —\nU.S. Quarterly Economic Forecast\nDespite eventful times in geopolitics, the global economic outlook has held steady, at least on the surface. But the global forecast shown in the table is just a number and doesn’t tell the story. There is significant variability between countries. The slight upgrade to the 2024 outlook is largely to the credit of the U.S., with smaller economies also pitching in, like the U.K. and Canada, along with some upgrades in emerging markets. In contrast, previous growth stalwarts like China and Germany have turned into notable laggards. One point of commonality is that global central banks agree that with inflation increasingly under control (Chart 1), it is time to cut to the chase. n nIn the case of Germany, the economy is still recovering from the energy shock in 2022. Consumer and producer prices rose more than in the rest of the euro area, and household and business confidence is still struggling to recover. Germany contracted in the second quarter and is at risk of a repeat in the third quarter. On the other side of the channel, the UK has outperformed through the first half of the year. n nChina’s strong start to the year toppled under the weight of a shrinking real estate sector and depressed consumer demand. The result is an economy flirting with deflation. There is a real risk that China will miss the growth target set by authorities, with government stimulus measures, so far, proving insufficient in reviving consumer and business confidence. n nIt is the shot being heard around the world. Commodity prices have responded to concerns of weak Chinese demand, with the outlook for crude oil prices collapsing US$10 per barrel in just over two weeks despite OPEC+’s deferral of production increases. This has forced a downgrade to our near-term oil price forecast. For central bankers undertaking a rate-cut cycle, this isn’t a bad thing since it helps in tapping down headline inflation. But, it may reflect only short-term relief. Oil prices next year are forecast to average $77 per barrel as falling interest rates support demand and OPEC maintains its attempt to carefully manage global oil supply. n nIs this really a U.S. goldilocks economy? n nOver the past quarter, developments in the U.S. economy have read like a storybook. The economy has cooled, but not toppled. Economic growth remains just above 2%, otherwise described as the ‘trend pace’. The labor market has also moved back into balance (Chart 2), and inflation has commenced a convincing descent towards the 2% target. The Fed finally has the confidence that it can lower interest rates without stoking too much heat back into the economy. For forecasters buffeted by major swings in recent years, the goldilocks scenario feels too good to be true. n nGetting into the nitty gritty of the economy, growth has been revised marginally higher for 2024 to 2.6%, although we expect the pace to continue slowing towards 2% by the end of the year. A similar clip is on tap for next year, as lower interest rates provide a floor under demand. Consumer spending has been resilient thus far, but the central bank must be mindful of the headwinds coming from the erosion of pandemic era excess savings and rising delinquency rates across products and credit quality. Consumers are feeling the weight of high interest rates and need relief, particularly now that labor demand has returned to its cooler pre-pandemic temperature. Likewise, housing demand should improve next year, coming off tough affordability conditions. n nFortunately, business investment has fared better than anticipated. However, this too could lose some of its heat. The second quarter was boosted by aircraft orders that tend to be lumpy and often lead to give-back in the coming quarters. If so, the good news is that it won’t be sufficient to upend the sector. The transportation segment still has room to recover as borrowing costs come down. Investment in fleet (trucks, trailers and other light vehicles) remain 25% below pre-pandemic levels due to past shortages. So, while overall business investment should slow modestly over the next year in line with the overall economy, the easing interest rate cycle will limit the downside. n nThe economy looks strong on the eve of the presidential election, but the outlook for fiscal policy is a key uncertainty. Our base case is for government spending to slow, and this is more likely to occur under a divided Congress, which typically leads to constrained fiscal activity. Adding to that is a slowing in state and local spending from higher levels coming out of the pandemic, but there will continue to be an impulse on the infrastructure side. Readers should note that our base case embeds no changes in tax policy because, historically, governments find other compromises to avoid sunset clauses. This is particularly important to the regime of personal income taxes, which are set to expire at the end of 2025 under the TCJA of 2017. In the event Vice President Harris wins the presidency, we are more likely to see some alteration to personal taxes. This could result in a small downward revision to economic growth in the range of 20 to 30 basis points in 2026 depending on the extent of changes and compromises with Congress. n nFinancial markets agree with our view that we are set for a longer period of easing in the fed funds rate. The Fed opted to go big in its first interest rate cut, with a half percentage point reduction. There was a strong case for this given that inflation has eased to about 2.6%, and the real policy rate is very restrictive – at about 300 basis points above its 20-year average! Now that the Fed has shown a willingness to act decisively to bring the fed funds rate to a less restrictive level, we expect they will follow through with another half point cut in November, before moving a more gradual cadence of quarter point reductions per meeting thereafter. However, as Chair Powell emphasized in the press conference, the Fed’s pace is not on a pre-set course and would be decided on a meeting-by-meeting basis based on the incoming data. Fine tuning the policy rate is an art, not a science. However, the pace of interest rate cuts does not change our view that the goal post is still a neutral rate of 3%.
