Global economic outlook shows uncertainty around elections

The KPMG global economic outlook for the second quarter shows lots of uncertainty around elections as half the planet’s population go to the polls this year, but gross domestic product is forecast to rebound next year.

KPMG International forecasts that gross domestic product (GDP) growth slipped from 2.7% in 2023 to 2.5% in 2024, but there a return to 2.7% growth is forecast for 2025. Inflation is forecast to continue cooling in most regions, but price pressures could take longer to unwind

The latest predictions in KPMG’s Q2 2024 Global Economic Outlook reflect the current elevated geopolitical uncertainty, with nearly half of the world’s population already voting or heading to the polls in 2024.

Armed conflict and trade tensions are also flaring in numerous parts of the world which could fuel more isolationist policies. KPMG’s international team of economists warn the resulting risk could be more frequent bouts of inflation and the possibility of activist monetary policies. 

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A slower expected glide path on rate cuts by the US Federal Reserve, which plays an outsized role in global financial markets, will have a larger impact on rate decisions by developing economies, KPMG says.

“These markets are more sensitive to the exchange rate movements than we have seen in the past. Weakening currencies relative to the US dollar are inflationary for those economies. To further complicate matters, foreign exchange markets have been reacting to unexpected election outcomes.”

The KPMG economists say between interest rate uncertainty and the elections, business leaders remain hesitant to engage in major investment projects. “Consumers are also cutting back on financed goods due to elevated interest rates, while governments face higher financing costs as debt rolls over at higher interest rates.”

Supply chains and logistics in global economic outlook

When it comes to supply chains, friend-shoring, re-shoring and near-shoring are reshuffling supply chains as producers hedge against geopolitical risk, often at higher costs. KPMG says the conflict in the Middle East has caused seaborne trade to be rerouted, while higher-than-expected demand and weather have also increased shipping costs.

In addition, the National Atmospheric and Oceanic Administration expects a record number of major storms for 2024, which will only add to shipping times and snarled travel. The first is currently causing destruction in the Caribbean, six weeks earlier than usually expected.

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However, despite uncertainty deepening this year, KPMG’s economists remain cautiously optimistic about the long-term outlook. Yael Selfin, chief economist at KPMG in the UK, says prospects for 2025 are better, with inflation expected to return towards target and central banks more confident to cut policy rates from the current restrictive levels.

“The silver lining is a tailwind for big-ticket consumer purchases and business investment. Merger and acquisitions activity could also gather steam, as financial conditions ease and dry powder is deployed. However, the uncertainty remains around the policy shifts, which will likely fuel more insular and protectionist policies.”

GenA productivity boost far off

The much-vaunted productivity boost from generative artificial intelligence (GenAI) is unlikely to appear at the global level for several years, the KPMG economists say.

”One of the largest hurdles is the energy needed to run the large language models. Those costs could exacerbate inequality between the developed and developing economies. While advances in AI could also disrupt the labour markets during the transition period, KPMG’s economic forecast is nonetheless consistent with a broadly stable unemployment rate globally.”

Regina Mayor, global head of clients and markets at KPMG International, says for politicians and central banks, the challenge going forward is contending with the rise in political uncertainty, deglobalisation and a changing workforce demographic, at a time when international collaboration and simply the availability of people to increase productivity, is at a premium.

“While challenges remain, the outlook, in my view, is cautiously optimistic. The inflationary pressures are easing in many parts of the world and the political will is gradually shifting toward consensus on the need to drive growth. There will be bumps in the road ahead, but we’re slowly seeing light at the end of the tunnel.”

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All eyes on South Africa in the past week

Frank Blackmore, lead economist, at KPMG Southern Africa, says South Africa had its general election in the final week of May, with results showing that the ANC failed to gain a parliamentary majority for the first time since the end of apartheid. 

“Government mismanagement and malversation especially over the last 15 years led to a lower-than-expected voter turnout pushing for change. Substantial uncertainty, as witnessed from the depreciation in the rand over the days following the midweek election, surrounded the government that was to be formed depending on whether that coalition is struck with more populist fundamental parties or more market-friendly centrist parties.”