Quarterly Outlook 2023–2025: Soft Landing Yet Again
Genevieve Signoret & Delia Paredes
Our scenarios are out! Read the full report here, or the summary below.
Summary
Growth has been more resilient that we expected. Of course, two upside risks to our year-ago central scenario did materialize: China opened early, and Europe had a mild winter. But this is not the whole story. The rest of the story is that the post-Covid recovery has not followed typical business patterns, rendering it tougher than usual for us to forecast accurately. For example, we far underestimated how strong and lengthy would be the resurgence in global demand for services. How long it would take to lure workers back into the work force. So not only growth but also the stickiness of core inflation have taken us by surprise.
Our new central scenario is called Soft Landing … again! This is the same name as our central scenario of one year ago and, in it, again we anticipate that the U.S. economy will slow down until nearly coming to a stop in before, in quarter two of 2024, picking back up; and again we anticipate that Europe goes into a short and mild recession. But, this time, given Mexico’s likely pre-electoral spending spree, we see Mexico continuing to grow at a lively pace—up until the quarter-two presidential elections, that is. For after that we see a recession.
U.S. GDP growth by 1.8% this year but a near 1.0% next year. Mexican growth rates hit 3.2% in 2023 and 2.7% in 2024 but end 2024 in a dive and by 2025 have turned negative.
U.S. headline PCE inflation slides nicely down to 2.2% by December 2024, but stickier core inflation doesn’t make it below 2.4%.
No central bank rases rates in Soft Landing, and the Bank of Japan continues to expand its balance sheet. But the Fed and the European Central Bank continue to try to tighten financial conditions by shrinking theirs.
By the end of 2024, the dollar has appreciated against the peso to $1=19.50 pesos but fallen against the yen to $1=¥129 and against the euro to €1=$1.14.
The yield on a 10-year U.S. Treasury security falls to 3.50% by December 2024 from its current 4.2%.
We also envision two risk scenarios.
We call our downside risk scenario Hard Landing. The world goes into recession in coming quarters, and Mexico double-dips into recession in 2025. Not only growth but also inflation and interest rates are lower than in Soft Landing. Compared with our central scenario, by end-2024, the dollar is stronger in terms of both pesos and yen.
We’ve named our upside risk scenario Goldilocks because, in it, the economy is neither too hot nor too cold, it’s just right. Growth, inflation, and rates are higher than in our central scenario, and Mexico and the euro area avoid recessions. But inflation rates are a bit higher than in Soft Landing, too, and so are interest rates. The dollar is weaker in terms of all the currencies we forecast: the Mexican peso, the euro, and the Japanese yen.