Monthly international economic outlook

Summary

Forecast changes

• With the Federal Reserve opting to front-load policy rate cuts in September, we have made notable changes to our fed funds rate forecast. We now believe the Fed will cut policy rates 25 bps in both November and December. The same 25 bps rate cut pace is also likely to now continue through the middle of 2025, with the Fed achieving a terminal rate of 3.00%-3.25%. Our G10 central bank forecasts are broadly unchanged; however, given renewed inflation challenges and fiscal dominance risks, we believe the Brazilian Central Bank will raise rates more aggressively.

• As far as the global economy, our global GDP forecast is little changed; however, we have revised our China GDP forecast lower. We now forecast China's economy to grow 4.6% this year, falling short of the government's 5% target growth rate. In our view, while recent policy support is notable, announced measures are insufficient to address underlying challenges to growth or existing vulnerabilities within China's economy.

• We have made notable revisions to our longer-term outlook for the U.S. dollar, which we now believe can strengthen through all of 2025. With the Fed likely to end its easing cycle by the middle of next year—while foreign central banks are likely to maintain easing cycles throughout 2025—and U.S. growth outperformance likely to return, two pillars of support should be established that push the dollar higher against G10 and emerging market currencies. Select foreign currencies can perform well in the medium term despite an environment of dollar strength, particularly the Brazilian real, Mexican peso and Japanese yen.

Key themes

• The health of the U.S. labor market has become a focus for FOMC policymakers, and the slowdown in job creation likely prompted the Fed to lower policy rates by 50 bps in September. However, the 50 bps pace is not likely to become a trend as policymakers suggest a more gradual pace of easing will be delivered going forward. Fed easing has generated policy space for central banks around the world—particularly in emerging Asia—to begin easing cycles of their own, and we expect policymakers in Asia to lower policy rates through the end of this year and in 2025. Select Latin American central banks can also continue cutting policy rates.

• Our global GDP forecast is little changed this month; however, risks to global growth are tilted to the downside. China's economy has yet to stabilize amid multiple challenges to growth. In our view, the latest round of policy stimulus is notable, but will do little to alter China's growth trajectory or solve the underlying problems plaguing China's economy. We also believe the Eurozone economic recovery is showing some fragility as sentiment weakens. The combination of slowing China growth and a weaker Eurozone introduces downside risks to the global economy in 2024 as well as 2025.

• We expect the U.S. dollar to be pushed and pulled in different directions through the end of this year; however, we have become more confident in the longer-term prospects of the greenback. With the Fed getting the heavy lifting on rate cuts out of the way early, interest rate differentials may favor the dollar as 2025 progresses. Also, we forecast U.S. economic growth to pick up again starting from during H1-2025, which should also support the dollar over the longer term. As monetary policy and growth differentials become more attractive in the U.S., the U.S. dollar should benefit over the course of next year.

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