International economic outlook

Summary

Forecast changes

• We have not made material forecast changes to our economic or inflation outlooks. This month, we continue to forecast 2024 global GDP growth of 2.9% and global CPI inflation of 3.6%. In the United States, we maintain our view for a “soft landing” although acknowledge that recession risks are rising. Internationally, we believe the European-wide economic recovery is intact, and while China's economy remains in an overall downturn, we have kept our 2024 GDP forecast of 4.8% unchanged.

• Arguably the most notable forecast change we made this month is that we now believe the Federal Reserve will ease monetary policy more aggressively than previously envisaged. While we continue to believe the FOMC will initiate an easing cycle in September, we now forecast a 50 bps cut at the September meeting followed by another 50 bps cut in November. In select cases, faster Fed easing creates space for foreign central banks, such as the Bank of Canada, to also cut rates faster; however, we now believe the Bank of Japan will delay further hikes until 2025 and the Brazilian Central Bank will now pivot back to rate hikes in the near future.

• Our view on the short-term path of the U.S. dollar is little changed, and we continue to believe the dollar can trend higher through the end of this year. Medium to longer term is where our dollar outlook adjustments are most noticeable, as we now believe the dollar can strengthen during the second half of 2025 as opposed to a prior forecast for ongoing greenback depreciation. The longer-term outlook change is centered around Fed easing being front-loaded, while international central banks remain in easing mode through the end of next year.

Key themes

• The threat of a U.S. economic recession injected volatility into financial markets over the course of early August. Adding to those fears was a Bank of Japan rate hike that resulted in equity market volatility as well as a global unwind of the FX carry trade. U.S. recession fears introduced the idea that the Fed is behind the curve in shifting to more accommodative monetary policy, and while we maintain our view for a U.S. “soft landing”, we do believe labor market deterioration will be the driving force of aggressive Fed rate cuts in the coming months.

• Faster Fed easing creates policy space for foreign central banks to also ease quicker, which, in our view, will be the central banks closely integrated into the U.S. economic cycle. Central banks that have kept policy rates steady over the course of this year may also have room to begin easing cycles, and we believe institutions in emerging Asia will start lowering policy rates before the end of this year. However, not all policymakers are as heavily influenced by the Fed, and local economic conditions are still likely to dominate rate decisions most notably in Japan and Brazil.

• With the Fed now likely to respond to economic conditions with aggressive easing, our outlook for the U.S. dollar has changed. In the short term, uncertainty over global economic conditions, financial markets, the U.S. election, and the precise path of Fed monetary policy can keep the dollar supported through year-end before some weakness in early 2025. But under the assumption the Fed cuts rates 50 bps in September and November, and slows the pace of easing in 2025, we believe the dollar can recover ground in the second half of next year.

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