Swiss Re's Economic Insights: Growth, Inflation, Rates

In the latest edition of its Economic and Financial Risk Insights, Swiss Re has revised its gross domestic product (GDP) forecasts upward. Europe's recovery is happening sooner than anticipated, and the US economy is expected to maintain its current pace rather than slow down. Strong domestic demand in the first quarter led to increases in US GDP forecasts for 2024 (2.5 percent, +0.3ppt) and 2025 (2.1 percent, +0.2ppt) despite overall first-quarter GDP growth in the US falling below expectations at 1.6 percent quarter-over-quarter. Forecasts for 2024 GDP in the European area and the United Kingdom are also raised due to early signs of recovery and expected growth in European domestic demand. China's 2024 growth forecast is raised to 5.1 percent (+0.4ppt) based on strong first-quarter GDP growth despite ongoing challenges in areas like housing.

Regarding inflation, Swiss Re notes that the United States is facing persistent inflationary pressures, leading to a macroeconomic challenge. US consumer price index (CPI) forecasts for 2024 (3.1 percent, +0.4ppt) and 2025 (2.5 percent, +0.2ppt) are revised upward, anticipating slower disinflation in services and potential risks from transport prices and housing costs. Japan's CPI forecasts for 2024 (2.6 percent, +0.2ppt) and 2025 (2.0 percent, +0.3ppt) are raised due to higher wage and rent inflation, along with currency and oil price assumptions. In Europe, CPI rates are expected to converge to the European Central Bank (ECB) and Bank of England's (BoE's) 2 percent targets by midyear before increasing later in the year.

As for interest rates, Swiss Re expects central banks to be cautious due to strong economic conditions. They anticipate fewer interest rate cuts this year, including two from the Federal Reserve (down from three), three each from the ECB and BoE (down from five), and a slight reduction in cuts by the People's Bank of China.

Concerns over currency depreciation against the US dollar in emerging markets may delay or reduce rate cuts, with some countries even considering preemptive rate hikes. While ECB cuts are expected to start in June before those of the Federal Reserve, caution is advised. Japan is projected to see one additional hike in both 2024 and 2025. Forecasts for US and European 10-year yields are adjusted accordingly.