Charts of the Week: The Year in Review

The growth consensus for 2024 One of the defining features of the global economic landscape this year has been the resilience of the US economy. The Blue Chip consensus for US GDP growth in 2024 has been steadily climbing for over a year, notwithstanding tight monetary policy from the Fed this year and a weakening global backdrop. To that last point, and in contrast to the US, growth expectations for Japan have steadily declined over the past 12 months while those for the euro area have remained notably lower compared with they stood through much of 2023. Finally, China’s growth outlook has been lifted a little over the last few months but that follows a succession of downward revisions to its GDP forecasts during the course of last year as well.

The inflation consensus for 2025 Just as growth expectations for 2024 for the world’s major economies diverged, inflation expectations for 2025 have diverged as well. Against a backdrop of resilient growth and a still-tight labour market, US inflation forecasts for 2025 have remain fairly elevated. That’s clearly now generating some uncertainty about the leeway for the Fed to further ease monetary policy next year. Meanwhile, China’s inflation outlook has declined sharply, reflecting weak domestic demand and deflationary pressures stemming from property market instability and high levels of indebtedness. The euro area, in the meantime, has seen relatively stable and more subdued inflation forecasts for next year, consistent with its sluggish pace of economic growth. Finally Japan's inflation expectations, while increasing, have remained modest. This too has generated some uncertainty about the scope for the BoJ to further normalise monetary policy next year, not least as growth expectations, as noted, have been declining in recent months as well.

US outperformance and global imbalances A resilient US economy has had a number of broader implications for the world economy, not least via savings and investment imbalances, and capital flows. As chart 3 below suggests, heightened optimism about the prospects for the US economy have accompanied forecasts suggesting that current account balances in other major economies – the gap between their investment and savings – will be larger than had been previously assumed. With most major economies already running large current account surpluses that implies larger reservoirs of global savings that need to be re-channelled, either for domestic investment purposes, or, more likely, into global – and particularly US - financial markets.

Safety, alternatives and US assets outperform That widening imbalance between savings and investment in other (non-US) economies offers a good explanation for why US financial assets – including the US dollar – outperformed non-US assets in 2024. The US dollar’s role as a reserve currency and the relative liquidity and stability of US financial markets are key considerations for this. That gold also posted solid gains was possibly a reflection of its appeal as a safe-haven asset against a backdrop of persistent uncertainty in most major economies. However, as chart 4 below also suggests, the cryptocurrency Bitcoin experienced even more impressive gains so far this year, thanks to growing interest in decentralized finance and possibly because of its role as an additional hedge against macroeconomic uncertainty as well.

AI optimism The US equity market also delivered robust returns this year because of heightened enthusiasm for technology stocks, particularly in the artificial intelligence sector. US leadership in the AI space is certainly suggested by the IMF’s readings for its AI Preparedness Index (AIPI), as evidenced in chart 5 below. The AIPI is, for the record, derived from assessments about four key dimensions deemed to be relevant for smooth AI adoption and specifically digital infrastructure, human capital, technological innovation, and legal frameworks.

Global trade concerns Optimism about AI, however, clearly contrasts at present with growing uncertainty about the prospects for the world economy next year. Potential shifts in US trade policy could, in particular, have amplified anxiety. That’s certainly the suggestion in chart 6 below by the sharp increase of late in an index for world trade uncertainty. If that increase foreshadows disruptions in world trade flows and broader global supply chain challenges that could clearly destabilise the world economy and threaten financial stability over the next few months. We will focus more on the key global macroeconomic issues and themes for 2025 in our publication next week.