By Nikolaj Schmidt

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Mapping the path from slowdown to recovery

The world is transitioning to manufacturing-led growth.

November 2024, On the Horizon -

The global economy is likely heading for a growth slowdown in the first few months of 2025 if weaker data from China weigh on the rest of the world. The good news is that central banks, particularly the European Central Bank (ECB), are well positioned to respond swiftly with rate cuts. A manufacturing‑led recovery in the second half of the year is highly plausible—although the precise timing of any such rebound is harder to call.

Monetary policy has been tight since 2022. Until now, however, this has been offset by the lingering impact of generous fiscal support. This has meant two things: first, that the rate hikes have not been as devastating as they might have been in the past; and second, that central banks have been able to hike more than anyone thought possible at the outset of the tightening cycle. Conditions are changing, however, and as fiscal tailwinds fade, the world is beginning to feel the impact of these hikes—and will continue to do so in the first few months of 2025.

Despite China’s recent stimulus injection, the macroeconomic picture there remains uncertain. Any slowdown in China will impact the rest of the world, but it will not affect all other regions equally: Europe’s heavier dependence on manufacturing exports means that China’s growth slump will hit it harder than the U.S.

Recovery will speed up transition to manufacturing‑led growth

High interest rates mean the ECB has the luxury of being able to ease monetary policy rapidly—and this is exactly what we expect it to do. Then, once rates come down meaningfully in Europe, the impact on growth is likely to be seen quickly as European households, which have accumulated a large amount of excess savings since the coronavirus pandemic, are likely to spend more. With some good fortune, the improving outlook for Europe could be further enhanced should there be a thaw in the Russia‑Ukraine conflict.

When it comes, the recovery is likely to hasten the ongoing transition to manufacturing‑led growth, which has been lagging services for several years (Figure 1). We believe there will be three key drivers of this: first, the release of pent‑up demand for interest rate‑sensitive goods consumption; second, a surge in infrastructure spending to meet the global push toward renewable energy and the rise of generative artificial intelligence; and third, the growing trend of companies choosing to shift their manufacturing bases to “friendlier” countries to ease supply chain concerns.

Manufacturing‑led growth is positioned for a comeback

(Fig. 1) It has lagged services for most of the past 14 years

As of October 31, 2024.
Source: Copyright © 2024, Markit Economics Limited now part of S&P Global. All rights reserved and all intellectual property rights retained by S&P Global.

Capex surge will boost international markets

What these drivers have in common is that each of them will require a major injection of capital. The sectors that provide the solutions—including industrials, energy, and materials—are likely to attract enormous flows of investments into physical assets in the years ahead.

These are multiyear developments, but their impact on the global economy is likely to be visible in 2025—particularly in the second half of the year. At that point, we expect monetary easing to have sparked a global economic recovery, albeit inconsistent across regions, characterized by a shift from services to manufacturing.

Key takeaway
A recovery in the second half of 2025 will likely hasten the transition to manufacturing‑led growth.

Nikolaj Schmidt Chief Global Economist

Nikolaj Schmidt is a chief global economist in the Fixed Income Division of T. Rowe Price. Prior to joining the firm in 2015, he worked as a director of Economic Research at Pharo Management. Nikolaj also held a position at Goldman Sachs and the Danish Ministry of Finance. He earned a master's degree in finance and economics at the London School of Economics and a Ph.D. in finance at the London School of Economics and Political Science.

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