Charts of the Week: Still Shining in the West

The growth consensus for 2025 The trends in chart 1 below highlight a world economy that is anything but synchronized. The US appears to be thriving in relative terms, while the euro area and the UK are caught in the doldrums. Japan remains a study in stagnation, offering stability but little dynamism. These divergent trajectories underscore a complex interplay of domestic factors—policy, demographics, and energy dependencies—against a backdrop of global challenges. For now, the US appears to be basking in the sun, but for others, the clouds may not just be lingering—they may be gathering.

The global growth consensus – the US versus the RoW Chart 2 below also underscores the global economy's uneven path, where US optimism contrasts starkly with widespread pessimism elsewhere. Notable downward revisions to growth forecasts for 2025 be seen across most major economies over the past 3 months, with the most significant adjustments hitting South Korea (SK), Hong Kong (HK), and Mexico (MXN). These sharp downgrades are indicative of broader challenges faced by trade-reliant economies, including slowing global demand and persistent inflationary pressures.

US inflation surprises and energy prices Persistent inflationary pressures were a key takeaway from January's US CPI report. Positive surprises in both headline and core CPI, alongside sticky service sector inflation and stronger-than-expected wage growth from last week’s employment report, present a challenging scenario for the Fed. One notable aspect, however, is energy prices. After six consecutive months of negative energy inflation—typically coinciding with downside inflation surprises—energy prices have risen in more recent weeks, pushing annual energy inflation to 1.0% y/y in January. Historically, rising energy inflation has aligned with positive inflation surprises. With global energy prices easing in February, this could influence future inflation trends and market expectations.

The global inflation consensus Still as chart 4 below underscores, inflation issues, while no longer out of control, still remain a persistent thorn in the side of many policymakers. The US and UK have seen forecasters’ inflation expectations for 2025 steadily climb in recent months and to levels that are well above their respective central banks’ target levels. Japan too has seen inflation expectations shift higher but that is arguably a more welcome development following several years in which deflationary pressures had been more in vogue.

China’s disinflation journey Deflationary pressures are in fact now far more of a thorn in the side of China’s policymakers compared with Japan. Chart 4 below illustrates a marked decline in consensus CPI forecasts for both 2024 and 2025 through the course of the past two years. What was once modest inflation is now edging perilously close to outright deflation in an economy clearly plagued by excess capacity and debt-related stress.

Monetary policy in Asia Moving back to global matters, Fed Chair Powell’s testimony this week signaling that the US central bank is in no hurry to cut rates suggests interest rate differentials remain a sensitive balancing act for a number of economies, including in Asia. For many, aggressively cutting rates risks putting downward pressure on their currencies, which could be perilous. That said, some exceptions have been emerging. For example, India, which had maintained steady rates for much of last year, moved early this month to cut rates, signaling a different set of priorities. Meanwhile, Australia now appears poised to follow suit, as it navigates a weakening domestic economy.