Global supply chain pressures have subsided, but political and fiscal uncertainty associated with elections in the United States and elsewhere will have a profound impact on the global economy over the next six months, according to a new Oxford Economics forecast shared with Grant Thornton International (GTI).
Oxford Economics’ global elections analysis focused heavily on the political environment:
- The results of a tightly contested U.S. election may have implications for tax policy, public spending, immigration and tariffs after Joe Biden’s election withdrawal propelled Kamala Harris into position to contest Donald Trump.
- In the UK, Labour’s win in July is expected to lead to tighter fiscal policy that may slow the economy’s recovery, but supply-side performance could improve if the government delivers on its plans to reform the planning system.
- The advance of right-wing parties in Europe could affect policies in France, Germany and elsewhere.
- As Narenda Modi settles into his third term as India’s prime minister, Oxford Economics is expecting current policy to be maintained, with a focus on infrastructure spending in the 2024-25 budget.
The second quarter of 2024 saw a rise of five percentage points in the portion of middle-market business executives who rated geopolitical disruption as a major constraint, according to the International Business Report (IBR) survey conducted by GTI. Argentina led all countries with a rise of 19 percentage points, followed by the U.S. and Australia.
“Political uncertainty and geopolitical tensions remain a key area of uncertainty and a risk to our baseline forecast, and that will undoubtedly affect the global economy over the next six months,” said Robert Bruce, an economist with Oxford Economics.
Real GDP forecast nudges upward
Oxford Economics’ baseline global GDP forecast for the coming months has improved slightly as a result of a stronger-than-expected start to the year in China driven by healthy exports and inventories. Real GDP growth now is forecasted at slightly higher than 2.5% for the remainder of the year, led by Asia Pacific and Africa.
Meanwhile, Oxford Economics expects global real exports growth of nearly 6% in 2024, led by Asia Pacific and the Middle East. Oxford Economics is forecasting steady but unspectacular growth in global trade over the next few years as trade restrictions and geopolitical tensions contribute risks to the medium-term outlook.
But global supply chain difficulties, which were nearly crippling for some companies during the COVID-19 pandemic, have returned to long-term historical average levels.
“We’re not seeing those huge supply chain pressures that we saw in 2022 and the start of 2023,” Bruce said.
He said the return to normal supply chain operations should further ease inflationary pressures and provide fuel for trade growth.
Oxford Economics is predicting interest rate reductions for the UK in August and the U.S. in September following the European Central Bank cut in June. But Bruce cautioned that the consumer economic optimism that bolstered the U.S. economy early in the year has taken a nosedive.
“Although consumers have been remarkably resilient so far amidst the high interest rates, this can only go on for so long, especially since U.S. households have drawn down a lot of those excess savings,” Bruce said. “And compounding all these factors is the political uncertainty surrounding the U.S. elections. These factors are reflected in the recent reversal in [consumer] sentiment.”
Middle market optimism surges
Middle market business executives’ sentiment on the economies in their own countries, on the other hand, has soared according to the IBR survey for the second quarter of 2024. The 71% optimism mark professed by business leaders across the globe was the highest since the beginning of 2018 and represented an increase of five percentage points from the previous quarter.
Good vibes from middle market business leaders in Indonesia, China and the United States led the way in the survey, with the portion of U.S. optimists jumping 14 percentage points from the previous quarter to 82%.
Oxford Economics’ forecast also shows:
- The U.S. consumer price index remaining stubbornly above the Federal Reserve’s 2% target until well into 2025.
- Global raw materials prices increasing about 2% in 2024 after drops of almost 6% in 2023 and nearly 7% in 2022.
- The struggling economy in Canada rebounding into positive real GDP growth numbers beginning later this year.
“There’s quite a stark difference between the U.S. and Canada,” Bruce said.
That difference between North American neighbors reflects the fundamentals of the overall global economy. Although there’s quite a bit of steady growth around the world, there still is economic pain in places such as Canada and the UK. The turbulence may be abating, but pockets of unsteadiness remain.
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