KPMG: Global inflation easing but high interest rates and public policy uncertainty take their toll on economic growth

Deceleration in growth in some of the world’s largest economies, coupled with little impetus elsewhere, could see global GDP growth easing slightly in 2024. However, with global trade plateauing in recent years, driven in part by the pandemic, geopolitical tensions and rising protectionist measures, the KPMG report warns of potentially large output losses from geoeconomic fragmentation over the longer term. The report forecasts global GDP growth of 2.2% in 2024 – down from 2.6% in 2023, with a return to 2.6% growth anticipated in 2025.

Produced by leading economists from KPMG member firms around the world, this year’s KPMG Global Economic Outlook report looks at the economic prospects for 37 countries and economic areas, including Romania, in 2024 and 2025, including the potential for the world economy over the next two years.

Yael Selfin, Vice Chair and Chief Economist at KPMG in the UK, said: “The latest forecast from KPMG’s Global Economic Outlook reflects the multiple underlying factors driving uncertainty and sluggish growth across the world. In the short-term inflation may be easing, but it’s coming at a cost, with consumer spending dropping and the cost of debt rising. Businesses are having to navigate a changing geopolitical environment, new hybrid working preferences, ESG adoption, as well as emerging technologies such as AI and big data. All these changes require increased investment, but most of them could potentially increase productivity and economic growth in the long term.”

Weaker economic momentum has helped ease supply chain pressures and reduce broader cost pressures. Our forecasts see world inflation averaging 5.0% in 2024 and 3.9% in 2025, down from an estimated 6.5% in 2023 and 8.0% in 2022. Risks are on the upside, however, as any further shocks to energy prices – or more persistent domestic inflation in some countries – could derail the relatively smooth return to central banks’ inflation targets next year.

Monetary policy has largely reached the height of the current tightening cycle. However, many central banks are likely to hold on before starting to ease again. The big question at the moment is when interest rates will start falling and how much lower they will go. KPMG’s view is that most central banks – including the U.S. Fed and the Bank of England – will not start acting until well into 2024, with rates settling at a significantly higher level in the medium term than during the decade prior to the Covid pandemic.

Regina Mayor, Global Head of Clients & Markets at KPMG International, added: “Monetary policy has had a big impact on output and growth prospects and there’s growing pressure for it to ease. When that happens remains to be seen. Many central banks are stuck between a rock and a hard place, cautious that loosening the screws could simply lead to an inflationary rebound. While we’re anticipating no significant change to unemployment figures, 2024 could be a year to monitor the impact of tight economic conditions for the corporate world. A wave of debt refinancing in a particularly challenging period could put real pressure on business leaders searching for an end to the prolonged pain of recent months. Combined with ongoing geopolitical uncertainty, the coming year could be potentially crippling for many.”

Ramona Jurubiță (photo), Country Managing Partner, KPMG in Romania, said: “Globally the outlook remains challenging, with the conflict in the Middle East adding to the uncertainty. The disruption to the Suez Canal route for shipping, affecting supply chains, is a cause for concern, especially when considering container and petroleum transportation. Nevertheless, in the last few years, businesses have faced considerable uncertainty and many leaders have developed a real sense of resilience and agility which has enabled them not only to navigate troubled waters but even to prosper, through fostering innovation.”

After a strong 5% growth in the first three quarters of 2022, the Romanian economy slowed down, advancing by 1.4% in the same period of 2023. High inflation eroded the purchasing power of households, slowing down consumption, which has been the main driver of economic growth in recent years. Even so, Romania’s economy had one of the highest growth rates in the region, estimated at 1.8% in 2023. In Poland, economic growth is expected to be of only 0.4% in 2023, while in the Czech Republic, the outlook is a contraction of 0.5%. A gradual recovery is expected in all three economies in 2024. Investments could be one of the main engines of growth, supported by infrastructure projects, digital transformation, and energy transition. Household consumption, which slowed down in 2023, could increase its contribution to the GDP in 2024 in all three economies, considering that the gap between the growth rate of the nominal wage and that of the inflation rate is expected to grow again.

Turning to Romania our country’s economic growth has outpaced that of its peers, despite the ongoing conflict taking place at its border with Ukraine. The average annual inflation rate in Romania continued to decrease in 2023, from a relatively high level. It is expected that this trend will continue in 2024, with inflation reaching a level of approximately 6.9%. This trend is similar to what is observed in economies across the region. In the Czech Republic, base inflation has significantly decreased after a peak level of 18% at the beginning of 2023. It is now anticipated to reach 3.3% in 2024, down from 10.8% in 2023. In Poland, inflation expectations could be halved, from 11.6% in 2023 to 5.6% in 2024.

Unemployment rates will remain at low levels in all three countries in the medium term, negatively affected by demographic trends. In 2024, the rates are expected to be around 5.4% in Romania, 5.1% in Poland, and 2.8% in the Czech Republic.

Ramona Jurubita adds: “Romania’s future growth potential remains high and this can be fully enabled within a framework of predictable fiscal and legislative policies, as well as through a focus on improving the country’s infrastructure. However, the uncertainties surrounding the recently adopted fiscal package have dented to some extent business confidence. The increase in VAT for some products and services and higher fuel excises will push up inflation on a more elevated path than initially envisaged in 2024. The introduction of new taxes, including the minimum turnover tax for large companies and additional taxes for credit institutions, together with increased turnover tax rates for a large number of microenterprises will have a negative effect on inflation and demand. Although the economy is set to benefit from high levels of investment supported by EU funds, we still have to see how these changes will impact both economic growth and macroeconomic imbalances in the near-term”.