SFC Outlook 2024｜Brian Coulton: There will be a widespread easing of monetary policy in 2024

In 2023, the global recovery remains slow with growing regional divergences. As major central banks may begin to cut rates this year, will the global economy perform better? What does 2024 have in store for the economy? 

Brian Coulton, Chief Economist of Fitch Ratings, in the insightful interview with SFC journalist, sheds light on global economic growth, the economic forecast of the U.S., the driving forces of the Chinese economy, and so on.

“We do see interest rates coming down across the world economy,” Coulton indicated. From Fitch’s investigation of 20 economies in the global economic outlook, the central banks in 19 of those economies are expected to cut rates in 2024. He suggests that there will be a widespread easing of monetary policy this year.

Global economy accelerated slightly in 2023

Brian Coulton: What we saw in 2023 was that the global economy actually accelerated slightly, so we saw world economic growth pick up to about 2.9% from 2.7% in 2022. That was a surprise. At the beginning of the year, we expected the global growth to slow quite significantly last year, and the reason was that we anticipated that the rise in federal reserve interest rates would have quite a big and rapid impact on the U.S. economic growth which slowed down. We were expecting to see a recession last year, initially in the U.S. that didn't happen. Instead, the U.S. economy actually accelerated, grew faster in 2023 than in 2022.

We also saw quite a strong recovery in growth in China, and that was primarily driven by the easing of pandemic restrictions, or the abolition of pandemic restrictions at the start of the year, which allowed consumer spending on various services which had been constrained by the restrictions to normalize. Nothing like a consumer boom going on, certainly not. But that normalization led to a pick-up in growth in China. And those two factors, more than outweighed a sharp slowdown in the Eurozone. And that slight slowdown was something we anticipated, and it was really about the fallout from the energy and the gas crisis that happened from the middle of 2022. So those are the various drivers of global growth. A better year than we and most people expected last year.

Brian Coulton: So on the China's story, what we saw with the pandemic restrictions that were sort of tightened again in 2022, that really weighed heavily on consumption. It was something that was constraining what we call contact-intensive consumption. So the consumption means that you have to be close to other people. So going to the cinema, going to a restaurant, or going to a busy shopping mall, all those things were constrained heavily by the pandemic.

When those restrictions were removed, there were some initial reluctance because people were obviously with health concerns. The removal of restrictions led to a bounce in consumption on those contact-intensive services. It was exactly the same pattern that we saw in 2021 and 2022 in the Western economies when they finally removed the pandemic restrictions. That was what drove the normalization in China. As I say, in the U.S. it was really the economy proved a lot more resilient in the face of monetary tightening than we'd anticipated. 

Three factors for U.S. economy being resilient

Brian Coulton: Very good question. And this is something that we got wrong, and almost the entire market got wrong, to be honest. There was a widespread consensus at the start of 2023 that the U.S. economy slowed down very sharply and probably going into a technical recession (which) will be a mild one.

That didn't prove to be the case. I think two or three factors to emphasize. One is that there was quite a very significant easing of fiscal policy last year in the U.S.. So we saw government spending on goods and services through the third quarter of 2023 rises by almost 5% in real terms, year on year. That's a huge growth in government spending, a lot of at the state and local government level, and health and education, but that definitely boosted GDP quite significantly.

We also had lower tax payments from the household sector that was also boosting household disposable income. And there's a measure of the underlying fiscal stats that put together by the IMF, which shows a very substantial easing of about 2% of GDP in fiscal policies. That wasn't expected to get at the start of the year. So that was one of the main reasons for the surprise.

Secondly, I think we're all a little bit surprised by the willingness of the U.S. household sector to continue to draw down saving. So through the course of the pandemic, in 2020 and 2021, there was a massive surge in what we call excess saving. So the saving ratio jumped very strongly, and that allowed households to build up. And the reason that happened was because there were lots of government transfers, spending was constrained at the time, income grew rapidly because of the transfers, but spending was constrained, so U.S. households and households in Europe, and elsewhere, built up a strong buffer of deposits and savings through the course of those two years. Now, this has been unique to the U.S.. The household sector was prepared to use those savings to draw them down and to spend more. So the ratio of consumer spending to income actually rose above its long on average, from 2022. And that was a strong support for growth. Again, something we didn't anticipate. We didn't anticipate that it would go on for so long.

The third factor is that the transmission of monetary policy tightening to the U.S. economy wasn't as powerful as a lot of models based on history what were suggesting. And so we saw a very slow pass through from higher policy interest rates to interest rates actually faced by households on their mortgages, because a lot of those are fixed for a very long term, that didn’t feed through very strongly. And the private sector in a very strong cash position before the Fed started to tighten rates, in particularly with the U.S. corporate sector is sitting on very large stocks of liquid financial assets. And those financial assets, which were mainly parked in bank deposits or money market funds, started earning a very good interest rate because the Fed raised rates, and that was passed through to short-term deposit rates and money market fund rates, and so that cushioned the blow of tighter interest rates. So all of those factors, I think, contributed to the surprising resilience of the U.S. last year.

Brian Coulton: We do think the global economy is going to slow down. Two key drivers of that. One, the pick up in growth in China that we saw last year was more of a kind of one-off type of adjustment. So this sort of (adjustment), we were calling it a normalization of consumption, as previously constrained consumption on services was allowed to go back to something much more in line with historical norms. But that's not something that creates ongoing growth. So we don't see the underlying strengthened consumer spending on a sort of sequential month basis that's not anywhere near strong. So that was one-off boost that we're not going to see this year. And that's partly why we're expecting Chinese growth to select to slow down.

The second factor is what I said about monetary policy transmission in the U.S. not being as powerful or rapid as we expected. So far, we still see a lagged impact from this year. And what we point to the fact that bank credit growth to the corporate sector and the household sector in the U.S. has slowed very sharply, and that we think is going to feed into lower growth over time. So it's the lagged impact of the monetary policy that we've seen today in the U.S. and the one-off booster growth in China last year fading out of the numbers. 

Eurozone will face downside risks

Brian Coulton: In terms of how our forecasts have been changing recently, where we've had positive revisions to our U.S. (economy) forecast. And there's probably still a little bit an upside risk to the U.S. outlook in the near term. Even though we do expect to slow down, some of the high frequency numbers are still looking quite strong on the labor market, retail sales. So I wouldn't point to the U.S. at the moment as being the key downside risk.

The Eurozone was where we cut our forecasts in December. And we are seeing some signs of real stagnation in the Germany economy. The German economy hasn't expanded relative to its pre-pandemic level, the Q4 2019 level. Germany's economy shrank in the 4th quarter and is now smaller, not as big as it was back in Q4 2019. Nearly every other advanced economy has exceeded that pre-pandemic level, following strong recoveries in 2021 and 2022. So I think there are downside risks in the Eurozone. 

Brian Coulton: We do see a slow down still in our forecast, quite a significant state, and we've got growth coming down in 1.25% to 1.5% this year, from what was probably around 2.5% last year. But we don't see a recession.

We think that the strength of private sector balance sheet, private sector liquidity is going to continue to dampen the impact of that monetary tightening that we've had over the last two or three years. Don't expect fiscal policy to be tight and sharp either. When we put all those things into the mix, we certainly do see a slow down. But we don't see a recession at this point. And that's come a bit of change of view from us. Up until our September 2023 global economic outlook forecasts, we were anticipating a U.S. recession, but we don't think that's the right call anymore. 

2024 is a pivotal year for monetary policy 

Brian Coulton: I think there has been a significant change in the last 3 or 4 months in how the central banks of viewing developments. And what's happened is the core inflation has come down quite significantly across the U.S., the Eurozone and the U.K.. Now, that's partly because of all the global supply chain pressures that were a big problem in 2021 and 2022. They eased quite significantly in the middle of last year, and we sort of lacked benefit from that in the 2nd half of last year on goods inflation, and we've also seen some declines in services inflation. And I think as that's happened, the central banks have become a lot more confident that they've now raised rates to a level that they think is what they called sufficiently restrictive, policy is tight enough now, they think in order to bring inflation back to target on a sustainable basis over the next 2 to 3 years, get back to their inflation targets. So that's quite an important change.

But what's gone with that change has been a very strong signal from central banks that they're not in any rush to start cutting rates. And so I think what we're going to be looking at is several months from now, in 2024, where the central banks are, debating the outlook and starting to talk about interest rate cuts. But we don't think they're gonna get there for a few months. So we do see interest rates coming down across the world economy. In fact, we cover 20 economies in our global economic outlook, and the central banks in 19 of those economies are expected to cut rates this year. It's only the Bank of Japan that we see rates going up. So we do think that there will be a widespread easing of monetary policy. So it is definitely a pivotal year for monetary policy in our view. But we don't think rates are coming down quickly or rapidly.

Brian Coulton: So we think the Fed is going to be probably on hold until June or July of this year. So, that's quite a different view to what's priced into financial markets, but that's our view that it will take some time for them to get comfortable with cutting rates. Remember, they've just been through a period of an inflation shock that nobody on the FOMC believed could ever happen again. I mean, there was a very strong view before the pandemic that inflation had been solved as a problem. So to have inflation hit 10% and stay very high for three years, it was a massive shock to policy makers.

So I think, having been through this period, and with services inflation still quite high and quite sticky, and with labor markets still tight, still pressure on wage inflation, which is not coming down fast enough, and it's far too high, I think they're gonna wait for some time, keep rates restrictive for another few months. So we don't see the FED cutting until June or July.

We think the ECB maybe a little bit earlier. And the reason for that is the core inflation improvements in the Eurozone have been even more impressive than in the U.S.. So core inflation has come down quite fast in the Eurozone. So we see the ECB going maybe a little bit earlier, but broadly, we think Q2 for the FED and the ECB. Bank of England, because core inflation is that much higher, we think they'll probably be waiting a bit longer, so probably more like Q3 for the Bank of England.

Brian Coulton: It's certainly not impossible, yet, we do think that's a risk being kind of ignored by the markets at the moment. We're not seeing services inflation come down that fast at all. We're seeing in the U.S. and a couple of other countries, very strong growth in housing rents. That goes into the CPI. That's not slowing down much at all. And on some measures, the U.S. housing market is is picking up again. Wage inflation is high.

And now we've got some developments happening in the Middle East, with the Red Sea trade disruptions. That’s gonna probably slow down the pace at which core goods prices fall, or may even see some increases in the next few months, in the wake of those disruptions. And of course, we don't know it's going to happen to commodity prices either. So it's possible with this conflict in the Middle East, it's possible that we could see all prices rise again. So, you know, there are lots of factors. Inflation forecasting is not easy.

And there's lots of factors because certainly I would say it's, it's probably more likely that we just see underlying inflation sort of prove a lot more sticky than the markets are expecting. I think that's probably a bigger risk. But there is also certainly on the headline inflation numbers, that inflation does pick up again. It certainly can't be ruled out.

Red Sea Crisis will bring more challenges to European economy

Brian Coulton: It's been quite interesting. If you look at a number of sort of high frequency indicators, like the cost of moving a container through from China to Europe, for instance, that has gone up quite sharply since the conflict has escalated. And we've had these issues in the Red Sea, nothing on the scale of what we've seen in 2021. And there is a big difference with 2021 when those supply chain issues were a real problem. Back then, we had a very strong surge in global consumer goods demand, and this was related to a massive stimulus in the U.S. and elsewhere, but led to a big increase in spending on IT equipment, furniture, bicycles, you name it, things that get delivered to your house in a box. There was a massive surge, a totally unprecedented increase, that was really probably a more important driver of the inflation, to be honest, than the supply chain itself.

The supply chain was just struggling to keep up with this huge jumping demand. We're not seeing that this time round. So goods demand is not falling. It's kind of growing, but it's much more steady. There's nothing like this sort of 30% increase in U.S. consumer goods demand that we saw relative to pre-pandemic levels. We saw that happened in 2021. So the demand side of the global goods balance is nowhere near as strong, but these disruptions are, you know, they are starting to show up in a number of the indicators that we look at. And we will see that, I think, in the next few months, in some of the CBI data.   

Brian Coulton: Well, to the extent that it slows down the pace at which the ECB cuts rates. I think that could be an issue. You know, we've seen a very quick feed through from higher ECB rates to lower credit growth in the Eurozone, and the construction sector in particular, has weakened quite sharply. And so, if we're looking for the ECB to provide some support, these disruptions could delay those rate cuts, definitely. And the weaker is world trade picture. It does have a particularly strong impact on those manufacturing and trade-focused economies in the Eurozone, which is basically Germany, Italy at the forefront.

Brian Coulton: We think that there will be an improvement. We do have a pickup in growth, from 2nd, 3rd quarter this year. And that's really driven by a view that as inflation comes down, headline inflation comes down, wage growth is going to be quite sticky. And so that's going to lead to an improved real wage growth picture. So we're going to see some recovering real wages, and we think that will help the consumer in Germany and elsewhere. But it's not gonna be a strong recovery. We do see that this weakness in world trade is weighing on the German recovery. And there's probably still some lagged impacts from monetary tightening to come through as well.

And, those things are sort of dampening what should be quite an important boost from the decline that we've seen in global gas prices. And that was a big negative shock in 2023. That the jump, the massive surging in natural gas prices in the 2nd half for 2022, was a huge shock that weighed on the Eurozone economy, in the German economy, particularly last year. But that shock is eased quite sharply. We've seen natural gas, car prices come down. So that's what we call an improvement in the terms of trade, and that should be helping things, but we think that's going to be dampened by the weakness of world trade and the weakness in Germany, and still some headwinds from monetary policy tightening.

Chinese economy had a good performance in 2023

Brian Coulton: Our base case view for China is the growth slows to about 4.5%. And as I mentioned before, that's partly because we see the one-off boost last year fading, and that's no longer be affecting growth. But to be honest, we think that the risks remain on the downside to that forecast now. So why are we expecting growth has to still stay fairly decent at 4.5%? I mean, we have seen some of the numbers improve recently. Better GDP numbers in Q4, at least the real GDP numbers were decent at 5.2%. We've seen retail sales growth pick up in the fourth quarter of last year, we've seen infrastructure investment improved, industrial production numbers improved. And we are seeing a pickup in credit growth. And of course, we've just had a step up in the pace of policy easing with this 50 basis points cut in the RRR. So those are all reasons to believe that the growth should see the sort of stay in a broadly in their sort of range that we think the government will be comfortable with. 

Brian Coulton: I think this is a welcome acceleration in the pace of policy easing. Frankly, we were quite surprised last year about how meek the government was in his policy response. We'd expected a more assertive macro policy easing response when we saw how weak the numbers were. The numbers were good in the beginning of the year, the first quarter. It looked like there was a strong rebound going on, and then they really faltered  in the middle of the year. And the property sector remained very, very weak through last year. 

And it was clear from August that the government was keen to support property and support the economy but they didn't really seem to be doing very much. The RRR cuts we had were quite small. We didn't see much on the of interest rate cuts. We only saw a very marginal pickup in credit growth, which we did have some fiscal measures. We think those are starting to help now. But these 50 basis points cut in the RRR is a bit more aggressive. This is a bit closer to what they were doing in 2015 when the property market was really weak. So I think that is a welcome move. I think from the growth perspective, our view is that there does need to be more assertive policy easing. We need to see a bigger boost in credit, and this easing in the RRR should help. 

Brian Coulton: I don't think I've gone far enough at this stage for us to be fully confident in our 4.5% forecast. I mean that forecast already anticipated some further easing. I think there will need to be more cuts, more support for property that they need to stop the property sector collapsing. Frankly, the numbers at the moment are just continues to collapse. Now, if that bottoms out, with this support to infrastructure and this wider fiscal support, I think we're quite comfortable that they can achieve growth of 4.5%. But if it carries on falling at 20%+, then we're not going to get 4% growth. So I think we're going to need to see some more policy easing to ensure the property sector stabilizes.

There are lots of uncertainties in global economy 

Brian Coulton: Also something people are gonna be watching very closely. There's lots of different aspects of this. Obviously, under the question that we receive a lot from investors, if there was a victory from President Trump, what would that mean for US policy? And how would that affect the rest of the world? Obviously, his first term, there were some significant tariffs were placed on China, which have not been removed. There were lots of threats of tariffs on other countries, including Mexico, for instance. So, that is one concern that we see more protectionist policies coming. 

I think one issue that we will be watching quite closely is one development that you saw under President Trump's first term, before the pandemic, was a very sharp slowdown in US net immigration. Now the US labor market at the moment is tight, but things kind of eased a bit on the supply side of the US labor market in 2023 because we saw a big recovery in net immigration. So we didn't really have an improvement in labor force participation, the share of people over 16 that were working in the economy didn't really move up very much. That sort of ratted down after the pandemic is not really recovered. But there was an improvement in immigration. And that was a factor that was helping employment growth and helping GDP, and preventing wage growth rising much more rapidly. If we were to see a sharp slowdown in immigration, that could mean that the US labor market conditions are tightened even further, which will be a problem for the Fed. 

Brian Coulton: Unfortunately, there's lots of uncertainties this year, with conflicts going on in various parts of the world. So I think there are lots of key risks of which that is one. Obviously, U.S. economic policy is hugely important to the rest of the world. So clearly it will be very much in focus. But China's growth outlook, the prospects for the European economy, the weakness in Germany's economy, the global implications of the rise interest rates in the Bank of Japan, so there are lots of issues, lots of uncertainties out there, which adds another level of complexity.

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