Macro Outlook Q4 2024

Figure 1: GDP growth 2025-2029, % Y-o-Y

Figures 2 and 3 show that what has changed is the shape of the forecasts. Over the near-term, we expect to see stronger GDP growth than previously expected. However, from 2027, we expect the negative impact of higher inflation and interest rates to start to bite, pulling down growth in the latter part of our forecast period. One of the key constraints on growth in that period will be a shortage of labor as immigration restrictions start to impact potential employment availability. If those policies are softer than currently messaged, we may see an upward revision to the forecasts shown in Figure 3.

Figure 2: U.S. GDP, % Y-o-Y

Figure 3: U.S. employment, % Y-o-Y

We are forecasting negative impact of increased U.S. trade frictions on other major global markets, particularly those that depend on export-driven growth. The China forecast has been revised down to a historically very weak level, despite an unprecedented large set of recently announced policy stimuli. Figures 4 and 5 show our forecasts for Chinese government bond yields and the budget deficit. It is quite unusual to make such large changes from one quarterly forecast to the next and this reflects the dramatic central bank intervention to manage down bond yields, and the fiscal stimulus plans that are now in place. Chinese policymakers are finally taking steps to try and mitigate the impact of what is now a multi-year property correction on the wider economy and to pull the economy out of deflation. As our GDP and inflation forecasts show, we are skeptical as to whether the policy announcements, while vast, are enough. There are eerie echoes of the deflationary bust in Japan in the early 1990s.

Figure 4: Chinese 10-year government bond yields, %

Figure 5: Chinese government deficit, GDP %

Higher for longer, yet again

Regular readers will know that we have long been in the “higher for longer” camp on interest rates and inflation. This reflects our view that six secular trends will drive the New Normal and all are inflationary rather than deflationary:

• Deglobalization raises the friction costs of trade even without higher tariffs.
• Weak demographics raise the cost of labor, especially if immigration is curbed.
• The up-front cost of AI investment is inflationary, even if AI is ultimately deflationary.
• Likewise, the up-front cost of the net zero carbon transition is near-term inflationary.
• Increased climate volatility raises the cost of food and energy.
• And all this is happening at a time when governments are carrying high debt loads relative to GDP and bond markets are more discriminating about sovereign risk.

Figure 6 shows our consumer price inflation forecasts. A key change since July has been to increase the U.S. forecast given the likely supply-side loosening and increased trade tariffs. The upward pressure on inflation is only somewhat mitigated by our forecast that energy prices will fall as production increases. Elsewhere, in the markets likely to be impacted by tariffs on manufactured exports, we are forecasting weaker economic growth and, therefore, reduced inflationary pressures.

Figure 6: CPI inflation 2025-2029, % Y-o-Y

Lower inflation and inflation expectations outside of the U.S. disappointingly do not translate into lower interest rate forecasts given bond markets’ heightened concerns about sovereign risk. Figure 7 shows that U.K. and Australian bond yields have increased to 4.5% or more.

Figure 7: 10-year government bond yields, %

We have reflected these changes in fixed income market sentiment, as well as in our bond yield forecasts based on announced and likely government policy in the U.S., U.K. and France. Figure 8 shows that we expect U.S. yields to rise to 4.5% in 2026-2027 before edging back down to 4%. The five-year annual average is 4.2%. We also expect to see U.K. bond yields remain elevated given markedly increased forecasts of public spending over the forecast period. The Eurozone average reflects our expectation that the French government bond premium over the German bund will remain elevated for similar reasons.

Figure 8: 10-year government bond yields, %

Focusing on policy rates, Figure 9 shows that we now expect a pause in cutting rates in the U.S. from H2 2025 to H1 2026, as the Federal Reserve mitigates some of the impact of increased trade tariffs. A strong U.S. dollar nudges our forecast for U.S. interest rates higher than for other major markets.

Figure 9: Central bank policy rates, %

Figures 10 and 11 show a continuation of the recent trend of strong U.S. dollar appreciation against its major trading partners. This is another reason why our upward revision of U.S. inflation isn’t more pronounced, as a stronger currency is net deflationary.

Figure 10: USD per EUR spot rate

Figure 11: Yen per USD spot rate

Macro Outlook Q4 2024