The International Monetary Fund's (IMF) latest World Economic Outlook characterizes the global economy as “resilient despite uneven growth.” We see the same in our forecasts.

After a solidly disinflationary 2023, recent inflation readings in developed countries have been a mixed bag. Labor markets are only gradually loosening. Growth is uneven, with the U.S. accelerating while others are trying to escape a stall. Policymakers everywhere are struggling to balance growth and inflation.

Soft (or soft-ish) landings are still likely in most places, but challenges will be inevitable. Following are our thoughts on how major markets are faring. 

United States

• Growth in America continues to exceed expectations.  The economy has been expanding at a real pace of over 3% over the past four quarters, well above its long-term potential.  Household and government spending are leading the way.  Details on recent performance can be found in our most recent U.S. outlook.
• Like a distant mirage, cuts from the Federal Reserve appear no closer today than they were at the start of the year.  Outsized payroll gains in the first three months of the year show a durably strong labor market; immigrants are filling vacancies.  The March consumer price index was discouragingly elevated at 3.5% year over year, pushed up by energy, shelter and services.  None of this gives the Fed any reason to hurry.  We now expect only two rate reductions this year, in September and December.

Eurozone

• The economic perseverance of the eurozone has been notable, and the prospect of having avoided a broad recession should be celebrated.  However, the experience has not been uniformly jovial.  Lingering supply chain disruptions and sluggish external demand have weighed on Germany's output; the region's worst economic performance has come from its largest state.  But recent measures of euro area industrial production suggest the worst of the cycle has passed.
• At its April meeting, the European Central Bank (ECB) gave clear guidance of a cut in sight for the region.  President Lagarde dismissed concerns that other nations may hesitate to cut, stating that the ECB is “data dependent, not Fed dependent.”  The data has been supportive, with annual inflation reaching 2.4% in March.  As long as prices remain controlled, easier financial conditions should keep the economy growing.   

United Kingdom

• The U.K. endured two quarters of minor contraction in the second half of 2023, but monthly flash estimates of output now point to a return to growth in the first quarter of this year.  Inflation has persisted in spite of economic moderation; the price level is still rising by more than 3% year over year, with services prices growing at double that pace.  The February employment report showed wages rose by 6.0% year over year.  An unexpected rise in the unemployment rate to 4.2% may presage some moderation on this front.
• The Bank of England's Monetary Policy Committee (MPC) has been a celebration of diverse perspectives, with the March meeting featuring votes to hike, hold and cut rates.  The decline in economic growth and rising unemployment offer reason to start some accommodation. However, a wage-price spiral is still a risk.  We expect a first cut at the August MPC meeting, and a total of three 25 basis point cuts this year, with a risk of fewer or later cuts if inflation does not cooperate.

Japan

• After a buoyant start to the year, Japan is settling into a steady state.  Workers are securing steady wage gains, which will support modest growth and moderate inflation. The realignment of global supply chains away from China creates more opportunities for Japan's export sector.
• In March, the Bank of Japan (BoJ) raised rates by 10 basis points and ended yield curve control on Japanese government bonds.  While a small increment, the hike was noteworthy for being the BoJ's first tightening in 17 years and for being the final bank to exit negative interest rate policy. Prospects for further tightening are limited: the economy will still be held back by demographic challenges.

China

• As discussed at length in last month's edition, the Chinese economy faces myriad challenges.  Solutions revealed to date have been all too familiar.  President Xi's focus on “new productive forces” shows insistence upon the old model of export-led growth, under a veneer of new technology.  Even if successful, these strategies will not help the beleaguered property and financial sectors.  And they have attracted the attention of the United States, which is moving to increase tariffs.
• First quarter GDP growth of 5.3% year over year sounded healthy at first glance, but that figure was lifted by an inflation adjustment: the nation's current bout of deflation is pushing its real GDP above its nominal level, which is not an ideal or sustainable condition. The Chinese currency has been weak, hindered by slumping stock markets and capital outflows.  The IMF invested a chapter in its latest outlook to describe how China’s declining fortunes will limit global prospects.  A large-scale demand stimulus is desperately needed.