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From recession to soft landing to Goldilocks
As we begin to close out FY2024, we use this week’s Brief to reflect on the performance of the global and Australian economies in CY2024 to date. Looking back at predictions over 2023 for the prospects for 2024, the consensus of economic forecasters (as reported by Consensus Economics) expected a global recession, with global GDP growth expected to come in at 2.2% (a growth rate of sub-2.5% is thought to be a recession).
Of the two largest global economies, the US was expected to fall into recession, while confidence was slumping over the prospects for China such that by October last year, it too was expected to lapse into recession. And the outcome?
The global economy has not fallen into recession and the narrative has shifted from recession to soft landing to (perhaps) a Goldilocks world of trend growth. Interestingly, Australia is an odd man out to this narrative in that it was never the case that Australia was expected to fall into recession.
Rather, it was expected that Australia would avoid a recession, but register below-trend growth; i.e., the soft-landing narrative. This narrative remains in place today, even though growth expectations have been lowered slightly from 1.5% to 1.3% currently.
The other region that stands out is East Asia. Here, the anomaly is that expectations a year ago were for around trend (4.7%) growth over 2024, rather than recession or below trend growth. Fast forward to today, and expectations remain for around trend growth (4.8%).
This is extremely important as the countries of this region, which include the economies of China, Hong Kong, South Korea, Taiwan, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam and Sri Lanka, constitute a little over a quarter of the entire global economy. Hence, the East Asia region has provided significant ballast to the global economy by remaining on track at trend growth.
In particular, US export growth has averaged a robust annualised pace of 3.9% over the second half of 2023 and the March quarter of 2024. It is not surprising that China, South Korea, Taiwan, India and Vietnam are among the US’ top ten export destinations.
What does the remainder of the year hold for the global economy? Let’s begin with the major developed economies.
Growth in the US appears to have peaked. The second half of the year should see the US economy slow back to trend growth, which is where it should become anchored in 2025 as inflation and interest rates trend lower.
The European economy, on the other hand, should show improving momentum, supported by ECB interest rate cuts and inflation falling back to the ECB’s target of 2% by the end of 2025. However, growth will remain below trend over most of this year before stabilising at around trend in 2025.
What about the economies in our region? East Asia should hang onto its trend growth rate over the remainder of the year and into next year.
And Australia? In our view, the Australian economy is currently at its low point. As we had forecast, the Australian economy barely scraped by in the March quarter growing by a mere 0.1%.
Prospects will improve over the second half of the year as tax cuts take effect in July and as inflation moderates gradually. However, a return to trend growth is not on the immediate horizon and we will have to wait until we are well into 2025 for the economy to stabilise at trend.
At that point, the impact of a modest two 25 basis point rate cuts by the RBA will begin to filter through the economy and inflation should have finally fallen below the top of the RBA’s inflation band of 3%.