The big picture, and why this time actually does seem different

• The global economy is slowing but abrdn expects the US to avoid a recession. While US unemployment is rising in a manner usually consistent with downturn, this time is likely to be different actually.

• But there’s still a risk of a US recession. To avoid it, abrdn says the Fed will need to approve a series of consecutive interest rate cuts.

• In Asia, Japan and China face very different challenges. Further rate hikes in Japan are likely and could stoke more volatility. Meanwhile, China remains on a knife’s edge with its growth targets.

When you’re investing, you sometimes just have to take a step back and look at the big picture. And with the Federal Reserve (Fed) finally cutting its key interest rates and shifting the world’s focus away from its battle with inflation and toward its next potential battle, this is an excellent time to do just that. So, let’s take a look at the US and some other major economies all around the world.

So what does the big picture look like now?

First, let’s zoom in on the US.

The US and the broader global economy are clearly slowing. Consumers’ pandemic-era savings stockpiles are almost depleted, lending-sensitive sectors such as manufacturing and housing are struggling, and the effects of those old stimulus measures have all but faded.

America’s job market has begun to falter and the rise in the unemployment rate has triggered the so-called Sahm rule, a trusted indicator of the start of a new US recession. And that’s where the market’s attention has shifted now.

Still, abrdn believes the world’s biggest economy will achieve the much-hoped-for “soft landing” – where inflation is successfully subdued without sparking a recession. It expects US economic growth to slow to 1.7% next year, from 2.6% this year but remain positive, helped by the stimulative effect of lower interest rates.

If that seems like a contradiction, it’s not (at least not entirely). And that’s because the signal from the rising unemployment rate is weaker this time – partly driven by a growing labor supply, with more folks coming off the sidelines and looking for work again and with the recent rise in immigration. At the same time, corporate profitability is still robust, mortgage delinquencies are low, and measures of household net worth are close to record highs.

What’s more, an easing in inflation should be good for sentiment and real income growth. Trends in US rental prices suggest the sticky “shelter” inflation component will continue to cool, albeit only gradually. While inflation may still surprise – perhaps thanks to a sharp increase in oil prices as tensions rise in the Middle East – overall consumer price increases are less of a worry.

Abrdn’s quantitative recession risk models incorporate a broad range of US economic data. And though their needles aren’t flashing red, they have been creeping up recently. And that switch in the risk environment suggests that the “inverse correlation” between stocks and bonds might come back again – meaning that when asset class falls, the other will tend to rise.

So it’s important to keep an eye on inflation and watch for any new signs of trouble in the US job market. The Fed has already cut its key interest rate by 0.5 percentage points and is likely to cut by another 0.5 before the end of the year. And next year, it’s likely to lower rates by a total of 1.25 percentage points, leaving the benchmark fed funds rate below 3%.

But the size and pace of those rate trims could change, especially if the Fed is prompted to react to wider labor-market or financial-market stress.

Next, let’s take a close look at Europe.

European growth is cooling, with the German economy looking especially weak as it struggles with cyclical and structural headwinds. But the European Central Bank (ECB) is still concerned about underlying inflation risks – particularly the strength of wage growth. Having started cutting rates earlier than the Fed, this worry might now start to slow the ECB’s roll, leaving it a bit more cautious about lowering borrowing costs.

The UK’s economy, meanwhile, is experiencing a cyclical upswing, which is likely to limit the Bank of England to a once-a-quarter pace of rate cuts this year and next. It’s too soon for the new Labour government’s measures to boost trend growth, so with spending space very limited, its first budget will likely involve tax increases. And those could become a headwind to growth and sentiment in time.

In Asia, Japan and China face very different challenges.

The Bank of Japan (BoJ) remains the major exception to global easing. Although the BoJ’s previous rate hike shook global financial markets, a significant increase in Japanese wage growth suggests that policymakers will want to continue moving interest rates higher. But the markets seem to be doubting the BoJ’s resolve, and that could cause another round of volatility for the currency and the broader market.

Across the East China Sea, China’s real estate adjustment appears not to be over, and will likely continue to drag down growth. A weak housing market is weighing on consumer confidence and will keep savings levels elevated. The troubled property sector also affects local government finances. That’s why it’s been touch-and-go whether China will achieve its 2024 growth target of around 5% – and why it’s likely that it will achieve growth of only 4.4% next year.

But a hefty new round of government spending and interest rate stimulus has given investors new optimism about the country’s prospects. Chinese stocks posted their best day since 2008 on Monday, with the blue-chip CSI 300 index soaring 8.5%, ahead of the market’s close for the Golden Week celebrations.

And, lastly, emerging markets and a few potential global risks.

Broader emerging market (EM) growth appears to be robust, but cooling. Headline inflation has returned to central banks’ targets across a growing number of EMs, even though strong labor markets and volatility in food prices and foreign exchange rates are now slowing the pace of disinflation in some places. That’s caused some EM central banks to tap the brakes on their rate-cutting plans, but that’s likely temporary. Sure, Brazil has returned to rate hikes, but that’s not likely a harbinger of a broader turn across the emerging world. In fact, EM rate cuts are likely to broaden as the Fed lowers its rates.

As for other, more global risks: abrdn’s forecasts are conditioned on a US presidential win for Vice President Kamala Harris, given her current lead in the polls. But the race is close and her rival, former President Donald Trump, has advantages on certain issues and in the electoral college system of voting. A Trump presidency that pursues inflationary policies, such as tariffs and tax cuts, as well as political interference in central bank matters, is seen as a key risk.

An oil price shock emanating from the Middle East is another source of risk. But a sustained improvement in the supply capacity of the global economy, perhaps spurred on by developments in artificial intelligence, may help keep prices in check.