Economic and financial risk insights: US rate cut hopes scaled back as economic strength stays robust

• We upgrade our growth forecasts for the US, Europe, and China for 2024 as US demand remains solid and economic recoveries take hold elsewhere, leaving our global GDP forecast at 2.6% (+0.1ppt).
• We upgrade US CPI inflation forecasts for 2024 and 2025, with no return to the 2% target until the end of 2025, driven by US economic strength and sticky core services inflation.
• We expect fewer rate cuts from the major central banks, given our positive upgrades to growth and ongoing inflation.

We raise our GDP forecasts as global growth divergence is narrowing, with Europe's recovery coming earlier and the US now expected to maintain its current momentum rather than slow (see Figure 1). We raise our US forecasts for 2024 (2.5%, +0.3ppt) and 2025 (2.1%, +0.2ppt) after Q124 final domestic demand, a strong indicator of underlying economic performance, grew by 3.1% q/q annualised. While overall US 1Q24 GDP growth was below expectations at 1.6% q/q, it was driven by volatile categories such as inventories and net trade. We raise our 2024 GDP forecasts for the euro area (+0.4ppt) and UK (+0.1ppt), due to earlier than expected signs of recovery (eg, in PMI data, see Figure 2) and expected strengthening in European domestic demand. We raise our China 2024 growth forecast (5.1%, +0.4ppt) on strong 1Q24 GDP, but still see weak sentiment and structural headwinds, notably in housing.

Figure 1: US, China and Euro Area qoq growth forecasts  

Figure 2: Euro area purchasing managers indices (PMIs)

Greater stickiness in the US is the key macro challenge (see Figure 3). We raise our US CPI forecasts for 2024 (3.1%, +0.4ppt) and 2025 (2.5%, +0.2ppt), expecting slower disinflation in services, such as upside risks from transport prices and potentially slower disinflation in shelter.

Figure 3: US Citi Inflation Surprise Index

We lift our Japan CPI forecasts for 2024 (2.6%, +0.2ppt) and 2025 (2.0%, +0.3ppt) on higher wage (see Figure 4) and rent inflation, as well as a weak yen and higher assumed oil prices. In Europe, our outlook is unchanged, with headline CPI rates to converge to the ECB and BoE's 2% targets around mid-year, before drifting higher into the year-end.

Figure 4: Wage growth in Japan

Policy normalisation to be limited by economies' strength. We expect fewer interest rate cuts from major central banks this year (see Figure 5). We now see two cuts from the Fed (previously three) given its message of continued patience; three each from the ECB¹ and BoE (prior: five); and 10bp less cuts by the PBoC. For emerging markets especially, currency depreciation vs the US dollar is a key inflation concern, if US rates remain elevated. Central banks may need to delay or reduce rate cuts (or even, like Indonesia, make pre-emptive rate hikes) to limit policy divergence. We still expect ECB cuts to begin in June, before the Fed given lower European inflation, but for there to be caution after. In Japan we see one further hike this year and in 2025. We nudge up our US and European 10-year yield forecasts to align with the revisions.

Figure 5: Central bank policy rate forecasts

Economic strength globally and persistent core services inflation point to fewer policy rate cuts and upside to 10-year yields.