Key points

• A softer inflation outlook in the United States increases the chance of rate cuts later this year.
• In the euro area, the European Central Bank kept interest rates on hold in July, after cutting in June.
• In the UK, better-than-expected economic activity has led us to raise our full-year growth forecasts.

Slowing economic activity in the US and modest growth in the UK and euro area suggest a moderate outlook for the world economy in the second half of the year. But with inflation in some areas still higher than expected, central banks face a tricky balancing act in cutting rates.

United States

US economic activity appears to be moderating as the growth seen in 2023 shows signs of subsiding. We anticipate full-year economic growth of around 2%. 

A fall in inflation¹ to 3% in the 12 months to the end of June, down from 3.3% in the year to May, cheered markets. They now anticipate a quarter-point interest rate cut by the Federal Reserve (Fed), the US central bank, in September.

However, Vanguard believes that the Fed will need to see continued supportive inflation data or a sharp slowdown in the labour market before it cuts interest rates. If the Fed is able to cut interest rates at all in 2024, we don’t foresee more than a single cut of 0.25 percentage points.

The Fed faces a tricky balancing act between cutting rates too soon and risking resurgent inflation, or cutting too late and potentially harming the economy. 

Euro area

The euro area is growing again, with the economy having increased by 0.3% in the first quarter of 2024 compared with the final quarter of 2023. We expect modest growth of 0.8% for the year as whole. 

However, surprising strength in services inflation (the prices that consumers pay for services) has led us to raise our year-end forecast for headline inflation from 2.0% to 2.2%. 

The European Central Bank (ECB) left interest rates unchanged at 3.75% in July after a 0.25 percentage-point cut in June, which ended a cycle of rate rises that began in July 2022. We expect the ECB to cut rates again in September and for interest rates to be at at 3.25% by the end of this year. However, the risk is that the ECB won’t be able to cut rates as much as we expect due to increased momentum in services inflation. 

United Kingdom

The UK economy grew by a stronger-than-expected 0.4% in May compared with April, the Office for National Statistics reported this month. This has led Vanguard to raise its forecast for growth in 2024 from 0.7% to 1.2%.

That said, we anticipate only a marginal impact on growth from the new Labour government, because it will be constrained by the same rules on government borrowing as the previous Conservative government.

Meanwhile, headline inflation remained at the Bank of England’s (BoE’s) 2.0% target for the 12 months to June, the same level as in May. This was higher than markets had expected and was due to stubborn services inflation.

The BoE held interest rates steady at 5.25% in June, but we still expect a rate cut at the central bank’s next meeting on 1 August. We think interest rates will end the year at 4.75% and be at 3.75% by the end of 2025.

However, the recent increase in economic activity raises the risk that the Bank won’t be able to cut in August and may not cut as much over the year. 

China

The Chinese economy hit a soft patch in the second quarter, growing by 0.7% compared with the first quarter and by 4.7% compared with the second quarter last year. 

China has set a goal for full-year 2024 growth of “around 5%”. We continue to foresee China growing by 5.1% for the full year, though continued imbalances in the country’s economy could challenge the growth outlook.

Inflation rose by 0.2% in the 12 months to June, less than the 0.3% pace in both May and April. We foresee full-year headline inflation of 0.8%, which would be well below the 3% inflation target set by the People’s Bank of China (PBOC).

The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as at 17 July 2024.

¹ Measured by the Consumer Price Index (CPI)

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