Will world interest rates fall further?

This chart shows the GDP-weighted world central bank discount rate (bank rate/Fed Funds rate/central bank lending rate) covering 83% of the world economy, as well as the median of world interest rates that I monitor . The median is the point in a series of data values at which half the observations are above and half below.  It is unweighted.  

The two different kinds of average interest rates usually move in more or less the same direction, though not always.  The GDP-weighted average will be dominated by the largest economies, the median is skewed more towards smaller economies, because they are more numerous.  Note how the median interest rate rose much more than the average before the 2009 GFC, likely making the recession worse; and how the jump in the median rate in 2011-2012 signalled that smaller economies were in trouble, worsening the downturn linked to the euro crisis.

Right now, the median is falling faster than the GDP-weighted average, which is consistent with my "small 15" average PMI index, which has been much weaker than the "big 8" index.  

Will interest rates fall further?  Well, yes, but not by much.  The ECB (European Central Bank) seems happy with its bank rate; the Fed is muttering about not cutting rates again; and the "small 15" PMI is rising fast, meaning smaller economies have become more reluctant to cut rates.  At the same time, world inflation has levelled off after falling from the post-Covid highs.  What is certain is that the low interest rates of the 2009 to 2021 years will not be reached again in this cycle.  Unless the AI-bubble pops .....

Clicking on the chart will make it easier to read.

June Big-8 PMIs tick up; but smaller econs slide

 Big 8 PMIs (US, UK, Euro Area, Japan, China, India, Brazil, Russia -- 70% of the world economy)  ticked up in June.   The averages are still above the 50% "recession line", but not by a lot.  

Europe is key to this:

But smaller economies continue to slide deeper into recession.   The gap between the big 8 and the small 15 (12% of world GDP)  is the biggest in 22 years.

The huge horrible hateful bill may give a short-lived sugar hit to the economy, but then again, it may not.   Billionaires are not known for their high propensities to consume, except perhaps on weddings in Venice, and taxes on ordinary people are going up.  And the backdrop to all this is higher tariffs, which affect the lower paid much more than the rich, plus the shrinking of the agricultural and food labour force, plus the uncertainty about what next Trump will do next.  A US recession still seems likely, but Europe may avoid it.  

Incidentally, Russian stats are in free fall.  Despite their massaging the data.

World economy on brink of recession

This chart shows the Big 8 GDP-weighted PMIs for manufacturing and services.  Just a reminder--the big 8 consists of the US, UK, EA (Euro zone), Japan, China, Russia, India and Brazil, and represents roughly 70% of the world economy.  I have extreme-adjusted each series before I created the global averages.

Some points to note:

1.  The index for manufacturing had started to rise, consistent with the beginnings of a new recovery after the impact of rising interest rates stopped rising in mid-2023, and started falling from Q4 2024.  Since Trump's tariff wars, it has been declining
2. The services index has been falling steadily since December.  Services can quickly respond to uncertainty, for there are no long supply chains, and no inventory.  For example, if you start to worry about the future, you can cancel or postpone your holiday.  That's harder to do with manufacturing.
3. The average of these two, which is a proxy for the whole economy, is drifting lower (though not plummeting) 

The small 15 weighted average PMI, which covers manufacturing only, historically tracks the big 8 quite closely.  However, over the last few months, a big divergence has opened up, as small economies as a whole have slid, though some have done much worse than others.  My small 15 make up 11.5% of the world economy, but there is some overlap with the big 8, since Belgium (0.58%) and Finland (0.18%) are members of the Euro Zone.

Finally, the GDP-weighted PMI for Asia (JP,CH,IN,ID,TW,KR,MY,TH) has plunged.   Together, these countries make up +-28% of world GDP.  Again, this is the PMI for manufacturing only.

The only bright spot:  manufacturing in Europe is picking up.   Will a nascent European recovery be sidelined by the trade war and its associated uncertainty?  Perhaps not, given Europe's economic heft.   And yet, the services PMI is declining.

My judgement is that the world is on the brink of recession. 

The small-15 PMI is falling precipitously

 It's been a long-term project of mine to look at how smaller economies respond to the cycles caused by the larger economies, what I call the big 8:  the USA, the Euro zone, China, Russia, Japan, India, Brazil and the UK.  

Since I don't have official PMI data going back much before 2012 for most of these small economies, and since I want to examine patterns over several business cycles, what I have done is to use business confidence time series to estimate what the PMIs would have been if they were available.  The correlation is usually close between business confidence and broader-based PMIs.  In some cases there are "PMI" series produced by other agencies, for example in South Africa and Australia, or there are PMI-like indicators, e.g, Sweden and Switzerland, produced by national chambers of commerce or industry.

I have not extreme-adjusted these series.  Where they are "spiky", I have smoothed them by fitting 7- or 5-month centred moving averages.

The results for the GDP-weighted average of the small-15, recently expanded to include Turkey, Mexico and Malaysia, look like this, when compared with the Big-8:

Notice how, until recently, the small-15 more or less followed the big-8, which is what you'd expect.   In fact, the small-15 had started a new upswing, parallelling the upturn that had started in the big-8, though from a lower point.   And then, starting in January, the small-15 turned down, quite steeply.

The last time the US raised tariffs sharply, during the Great Depression (the Smoot-Hawley tariffs), this worsened the global and the US recession, turning it into the Great Depression, as jumps in US tariffs were followed by increases elsewhere.  Note that it was a Republican president, House and Senate which passed the tariff legislation, leading to a massive swing to the Democrats which lasted 20 years.

The trade wars initiated by Trump are having the same effect.  The collapse is just beginning.   And every month that the tariffs and the tariff uncertainty remain worsens the situation.   Obviously, if tariffs quickly return to pre-Trump levels, the recession will likely be short.  But even then, damage has been done, and trade flows will be permanently altered.   Unfortunately, Trump shows no signs of changing course.  Even the supposed "reset" with China would still apply 30% tariffs to Chinese exports to the USA.  There is no one grown up in the Administration who will talk him down from the ledge.  No one in the Republican Party has the courage to stop him.  They fear his MAGA movement too much.  By the time Congress does act, it will be too late.