Sovereign debt challenges in Asia

Global economic outlook for November 2024

  • With inflation heading convincingly toward targets, advanced economy central banks have shifted their focus to protecting labour markets. The Federal Reserve (Fed, the central bank) began cutting rates in September, joining peers elsewhere in the world. Sanctions, tariffs and geopolitically induced supply-chain reconfigurations will create trade frictions, especially in strategic sectors, potentially diminishing the benefit of gains associated with advancements in technology and artificial intelligence (AI).
  • The November US presidential election is a toss-up, with both candidates gaining and losing the lead in polls and betting markets. A victory for Republican nominee, Donald Trump, would usher in policies that prioritise trade protectionism and tighter immigration controls, confirming a global shift towards more insular and less liberal policy settings. The Democratic nominee, Kamala Harris, would offer greater policy stability and predictability, while also protecting the US labour supply with policies that support legal immigration, but US trade policy would still retain a protectionist tilt.
  • Although our baseline forecasts continue to rule out a wider war emerging in the Middle East or Asia comparable in global impact to that of Russia’s invasion of Ukraine, risks of conflict will persist. The global geopolitical landscape will be characterised by growing economic and geopolitical divisions between emerging and developed economies, and intensified inter-state competition, notably between the US and Europe on one side and China on the other.

Geopolitics will drive changes in the global economy. The return of industrial policy—including sanctions, widening tariffs and the provision of incentives to key industries—will challenge firms’ ability to find efficiency in supply chains, stoke trade tensions in strategic sectors and make it more challenging to compete across the global marketplace. These developments will drag on growth potential, if not cause the outright fragmentation of global value chains. We forecast that global real GDP will expand by 2.6% a year (at market exchange rates) on average over the next five years—below the 3% of the 2010s, which was hardly a stellar decade for the global economy as it recovered from the balance-sheet recession that was the global financial crisis.

Despite headwinds from conflict and still-high interest rates, we do not believe that the global economy is at risk of recession in the next 12 months. US economic growth is slowing, but will remain firm, helped by strong household finances, a fiscal cushion as the monies from the three big policy initiatives of the current administration led by president, Joe Biden, continue to permeate into the economy, and innovation in its technology sector. Elsewhere, we expect momentum in Europe to build gradually from a low base, and China’s growth will be lifted slightly in 2025 by more vigorous stimulus. Emerging markets will benefit from a rebound in global trade and firm commodities demand, even though they will face challenges from a still-strong US dollar and high debt-servicing costs. We forecast that India’s expansion will be the fastest of any major economy in 2025-29.

Although the worst of the cost-of-living crisis is over, inflation is not forecast to return to the low trend of the pre-pandemic era. Inflation is close to target in many economies; however, we do not forecast a period of below-target inflation in the post-pandemic economy. This is due to a combination of demand and supply factors that should keep inflation at or slightly above target in the next five years. On the demand side, a tightening in labour markets, reflecting demographic changes and tighter immigration controls, will keep demand firm through higher wages. Meanwhile, on the supply side, the reshaping of supply chains, the wider application of tariffs and the likelihood of unpredictable climate conditions will also put upward pressure on prices. We forecast that inflation in developed markets will average 2.3% in 2025 and 2.2% over our five-year forecast period, up from 1.5% in the 2010s. In many economies, inflation will struggle to fall back to target. A major geopolitical confrontation would cause renewed price increases similar to those in 2022, with a disproportionate impact on lower-income economies.

A global monetary easing cycle is under way as central banks move from restrictive to neutral policy settings. The Fed responded to a softening US labour market, and inflation that was convincingly on its way to target with a 50-basis-point cut to its policy rate in September, and we anticipate two more cuts by year-end and a further 100 basis points of cuts over 2025. This will close a divergence that has emerged in global monetary policy, with the European Central Bank (ECB) and the Bank of England (BoE, the UK central bank) having started to reduce their policy rates in June and August respectively. Still, none of these central banks are expected to lower their policy rates back to the lows of the 2010s, and most estimate that the neutral interest rate is higher than the period between the global financial crisis and the pandemic. In China, a loose policy stance will be maintained in an attempt to fend off deflation, whereas we forecast that the Bank of Japan (BOJ, the central bank) will normalise policy gradually after exiting its negative policy rate. The constraints of tepid domestic demand and the strain that higher borrowing rates will put on Japan’s public finances limit how high rates can go while maintaining positive growth momentum.

The scope for fiscal loosening is limited in comparison with monetary policy. Elevated public debt levels and higher bond yields mean that the space to pursue fiscal expansion will also be constrained in most cases. A higher neutral interest rate means that debt-servicing costs will absorb larger portions of budgets, with defence, healthcare and industry likely to be the priority areas of spending. In this context, and given the long-term demographic challenges facing many markets, revenue-raising measures are likely. Global monetary easing has reduced risks around sovereign defaults among frontier markets, but those that emerge will generally prove complex to resolve, given a diverse set of creditors and the weakening influence of global institutions such as the IMF and the Paris Club. Periodic jitters in advanced economies’ bond markets are also likely as governments struggle to develop tax programmes that are sufficient to counteract upward pressure on spending.

The green transition and technological change will shape economies over the next five years. Poorer countries will be disproportionately affected by climate change and will struggle to secure financing to mitigate its impact. Although the hype of artificial intelligence (AI) and generative AI is probably overdone, we see scope for applications in industries as broad as drug development and other research and development intensive industries to call centres. The key for accessing AI in a corporate setting will be significant capital investment, and larger companies will be poised to take greater advantage of AI in the near term.

Global economic divergence will seep into domestic political trends. A hotter, more conflict-ridden world will continue to supply the global north with a steady influx of immigrants. Attitudes towards immigration have become increasingly polarised in North America and Europe as a result of governments’ handling of recent immigration waves. There is a significant risk that policymaking will generally become more insular—to the disadvantage of international co-operation on climate, technology and trade issues—squeezing the traditional centre-ground of democratic politics. Greater polarisation, however, has not yet been at the cost of democratic institutions, as evidenced by the peaceful and law-abiding elections carried out in 2024 in places as diverse as Indonesia, India, Mexico, France and the UK. Authoritarian regimes will face stability challenges of their own as prominent leaders age in office with unclear succession plans, and governance differences in many parts of the world will be brought into stark relief by threats ranging from climate change to terrorism and organised crime.

The global geopolitical environment is characterised by increasing competition. The sharpening conflict on Israel’s borders carries the risk of a wider regional war in the Middle East. Although we expect mediated negotiations between Russia and Ukraine to start by end-2025, there is little prospect of a durable peace settlement. The US and China have shown a desire to put “guardrails” in place around their self-described competition, but flashpoints in Asia, such as in relation to the South China Sea and Taiwan, will continue to pose a risk. The diffusion of global power and uncertainty over the direction of US foreign policy underpins the rise in geopolitical risk. If elected, Mr Trump is likely to implement abrupt shifts in terms of the US’s position vis-à-vis key international conflicts, relations with traditional allies and the country’s approach to arms control, global trade and climate policies. Ms Harris would pursue a traditional approach of the US as a global leader that puts a greater focus on engagement with allies and multilateral institutions.

The analysis featured in this article can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.