Global economic update: February 2024

The global economy is on course for a “soft landing” after the rapid increase in interest rates since 2021. Inflation is fast receding, and economic activity and employment is holding up. But the fact that growth has outperformed expectations also means that central banks are in no hurry to cut rates until they’re sure the battle against inflation has been won.

Economic headwinds are shifting

The global economy proved remarkably resilient to the surge in inflation and the aggressive rise in interest rates over the last two years. Although we estimate that growth in 2023 was among the weakest since the financial crisis (at 3%), it easily outperformed our expectations from early last year (2%). Labour markets remain surprisingly tight, with high levels of employment and solid wage growth helping to underpin demand. Inflation nonetheless receded rapidly through 2023 as the impact of past supply chain and energy shocks faded, and without the recessions and job losses that seemed likely at the start of last year.

Despite this better-than-expected performance, global growth is expected to remain weak this year. The lagged impact of higher interest rates on disposable incomes, as well as modestly higher unemployment, means activity is likely to remain subdued over the first half of 2024, in particular. The sharp slowdown in inflation in the second half of 2023 should allow many central banks to start lowering interest rates this year. But in their January meetings central banks have pushed back on expectations for cuts early on in 2024. Policymakers appear content to wait for a few months more before shifting their stances, as they look for further evidence that inflationary pressures are abating.