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Executive Summary

ECB cuts rate by 25 basis points as other central banks hold. Economic
survey respondents remain cautious amid global uncertainty and expect more
cuts; EU adds tariffs on China EVs.

Has the cycle of monetary easing started? After the Central Bank of Brazil, the ECB
has become the second major central bank to cut rates. This might bring some
much-needed relief to companies and households and could revive the construction
market. But there might be more. As the most recent economic survey showed,
global sentiment has slightly shifted south, adding to uncertainty amid possible
weakening growth. In that case, central banks might have more support for more
rapid rate cuts.

Interest rate cuts eagerly anticipated earlier in the year have largely not
materialized. In May, Brazil was the sole country among our surveyed economies to
cut rates; this month, it was the turn of the European Central Bank (ECB). After nine
months of holding rates steady, June 6 saw the ECB reduce its key interest rate by
25 bps to 3.75%, as eurozone inflation eased. Nevertheless, caution was perhaps
the prevailing factor, with the bank also confirming it would reduce the Eurosystem’s
securities holdings under the Pandemic Emergency Purchase Programme (PEPP)
by an average of €7.5 billion per month over the second half of the year.
Consequently, ECB policy has unfolded as a mix of easing (via the rate cut) and
tightening with the unwinding of the asset purchase program.

Caution amid global uncertainty is also reflected in the responses to McKinsey’s

latest Economic conditions outlook survey, published on June 27. Although
respondents tend to view conditions as improving both globally and in their own

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countries—and expect them to continue to do so over the months ahead—they also

foresee clouds gathering on the horizon.

Asked about four near-term scenarios for the global economy, respondents are
much more likely to choose the two that result in a recession compared to their
responses in the previous quarter. They are also concerned about the impact of
changes in trade policy and relationships on global growth, while they anticipate
rising unemployment rates at home. Moreover, in a few regions, the latest survey
finds more respondents predicting interest rate hikes in the months ahead.

China’s economy also likely remains front of mind both for domestic policymakers
and its trading partners. Both the EU and US have unveiled plans to increase tariffs
on electric vehicle imports from China. The EU will raise the tariff from 10% to up to
48%, while the US will quadruple its EV tariff from 25% to 100%, with significantly
increased duties on $18 billion worth of Chinese imports, including EVs, lithium
batteries, solar cells, steel, and aluminum. In response, China has vowed to defend
its interests against the new tariffs announced by President Biden. China also
announced a visa-free policy allowing passport holders from 12 European
countries, Australia, and New Zealand to stay in China for up to 15 days. According
to a Foreign Ministry spokesperson, this initiative is designed to “facilitate the high-
quality development of exchanges between Chinese and foreign personnel and
enhance high-level openness to the international community.”

Meanwhile, the slowdown in China’s real estate market continued in May. Demand-
side indicators revealed a decrease in sold floor space for new residential
properties of −19.0%, deteriorating from −17.1% in April; and the average new
home price fell −4.3%, declining from a −3.5% drop previously. On the supply side,

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floor space started was down −22.2% (−13.7% in April).

Transitions in political leadership tend to spark uncertainty and 2024 continues to be

a bumper year for elections, not least in the US, where presidential elections will be
held in November. Following recent ballots in India and the eurozone, July will see
national elections in the UK and France (both called unexpectedly), with voter
sentiment in these two neighbors trending in opposite directions. Markets are
particularly apprehensive of potential outcomes in the French elections, where the
far-right National Rally party and the New Popular Front (a left-wing coalition) could
squeeze the centrist vote and weaken President Macron’s grip on power. The
election result is due just weeks after the European Commission said that France
and six other countries (Belgium, Hungary, Italy, Malta, Poland and Slovakia) should
be disciplined for running budget deficits in excess of EU limits—a move that will
likely rein in spending options for the eventual winner of the French election. India’s
elections, meanwhile, which ran from April through June, have delivered Prime
Minister Narendra Modi a third term but with a reduced parliamentary majority,
which potentially makes it difficult for the government to push through major
reforms. Businesses and investors expect the new Modi administration to ensure
political stability and policy continuity in the world’s largest democracy and most
populous country, which is also the fastest-growing major economy globally.

Perhaps unsurprisingly, May saw consumer confidence retreat somewhat, led by

consumers in the eurozone and the US. However, most economies recorded a rise
in retail sales in light of receding inflation and consumers anticipating further
monetary easing. May’s retail and food services sales in the US (adjusted for
seasonal variation and holiday and trading-day differences) were $703.1 billion—up
0.1% from the previous month. The consumer confidence index (Conference Board)
rose to 102.0 in May, from 97.5 in April (a slight upward revision).

Overall, inflationary expectations are stable at around 2.0–2.5%. Consumer inflation

in developed economies remains under control, with the UK seeing it drop below
2%. In the US, the consumer price index (CPI) registered a 3.3% (annualized) rise
in May, lower than the 3.4% inflation figure for the 12 months ending in April. Core
inflation rose 3.4% (annualized) in May. Median inflation expectations at the one-
year-ahead horizon declined slightly to 3.2% from 3.3%, according to the May
Survey of Consumer Expectations by the New York Fed. The UK CPI fell to the
BoE’s 2% target in April 2024, for the first time in three years, mainly driven by a
slowdown in food prices, but partially offset by rising motor fuel prices. This marks a
milestone for the UK economy after the worst inflationary upsurge in a generation.
Core inflation (which excludes energy, food, alcohol, and tobacco) fell to 3.5% in
May, down from 3.9% in April.

Inflation in emerging markets has seen little change, though it rose in Brazil and

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remains elevated in Russia. China’s consumer price inflation held steady at 0.3% in
May, while producer prices deflated at a slower rate of −1.4%, improving from
−2.5% in April. In Brazil, inflation increased to 3.93% (3.69% in April), registering its
first rise in eight months to move away from the 3.5% target set by the Banco
Central do Brasil. This was driven mainly by food and energy costs, with the flood
disaster in the southern state of Rio Grande do Sul notably pushing up food prices.
Russia’s headline inflation jumped to 8.3% year on year in May, from 7.8% in April.

Most commodities were stable in June, but this month saw gold prices continue to
rise, reaching approximately $2,335 per ounce. Energy prices moved sideways but
remain above pre-pandemic levels. Similarly, while most metals also moved
sideways, copper prices remain high as inventories decline. Food prices have
picked up slightly as dairy and cereal prices are on the rise.

According to the composite leading indicators, the growth cycle across most
countries has already bottomed out and the majority are heading towards
accelerated growth. On the back of higher-than-expected eurozone growth in the
first quarter of 2024—up by 0.3% quarter on quarter—ECB projections point to
0.9% growth in 2024 (revised up by 0.3 p.p.), 1.4% in 2025 (down –0.1 p.p.), and
1.6% in 2026 (unchanged). Meanwhile, China’s industrial output in May recorded
year-on-year growth of 6.2%, a slight decrease from April’s 6.3%. In Russia, the
official estimate revises annual growth to 5.4% in Q1 2024, up from 5.1% year on
year in Q4 2023. Household consumption and government spending are expected
to drive further expansion this year.

Growth in both the manufacturing and the services sectors accelerated. The
situation in the manufacturing sector improved in most countries; Europe remains
the only region where manufacturing continues to contract, albeit at a slower pace.

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The standout was India, where the flash estimate for June’s manufacturing
purchasing managers’ index (PMI) accelerated to 58.5 (57.5 in May). In the US, the
industrial production index rose to 103.3 in May (102.4 in April), while June’s
manufacturing PMI rose to a three-month high of 51.7. However, the eurozone’s
economic recovery suffered a setback at the end of the second quarter of the year.
The forward-looking indicator, Eurocoin went from 0.26 to 0.18 in June. The
composite PMI dropped to 50.8 in June (52.2 in May), and the manufacturing PMI
saw a more pronounced decrease from 47.3 in May to 45.6 in June. France
registered a fall in output for the second month running. The UK’s manufacturing
sector showed signs of strength in May. The seasonally adjusted S&P Global UK
Manufacturing PMI rose to 51.2 (up from 49.1 in April)—its highest reading since
July 2022. Brazil’s composite PMI fell marginally from 54.8 to 54.0 in May, staying
firmly within the expansion zone for an eighth consecutive month. The fall in Brazil’s
manufacturing PMI to 52.1 in May (55.9 in April) is attributable to floods in Rio
Grande do Sul state, business closures, and demand reduction that curbed sales
growth and stifled production.

Service sectors continue to grow at an accelerated pace across most surveyed

countries, with India a standout here too: its services PMI climbed to 60.4 in June
(flash estimate) from 60.2 last month. The US recorded the steepest acceleration
with a surge in new orders that saw the services PMI climb to 55.1. Meanwhile,
expansion in the eurozone services sector softened to 52.6 in June (down from
May’s 53.2). The S&P Global UK Services PMI posted above the neutral 50.0 mark
in May for a seventh consecutive month, signaling a sustained expansion in output
across the UK’s services economy. The headline indicator did fall, however, to 52.9,
from April’s 11-month high of 55.0. May saw Brazil’s services PMI rise to 55.3 (from
53.7 in April) as new business placed with services companies in Brazil climbed.
The rate of expansion was marked, the fastest in 22 months.

Unemployment rates are stable across most surveyed economies, with India once
again a standout with a 13% decrease. May saw China’s overall surveyed urban
unemployment rate unchanged at 5.0%. The youth unemployment rate decreased
to 14.2% in May (14.7% in April). Meanwhile, the three-month moving average
unemployment rate decreased slightly to 7.5% in April (7.9% in March), down for
the first time this year, and lower than the same period last year (8.5%)

On the markets, equities in India, the US, Japan, and Germany reached new highs
in May, while markets in some European countries and some emerging economies
are struggling. Volatility in the equity and oil markets eased, but it remains elevated
in the currency and gold markets.

Overall, world trade volume increased by 1.5%, in April with increases in all trade
flows across emerging and advanced economies. At the same time, global supply

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chains continue to normalize. April saw exports increase in Brazil and the eurozone
but drop in India; imports also fell in India. April’s Container Throughput Index rose
to 128.8 points from 128.1 points in March, with throughput falling sharply in
European ports, but increasing in Chinese ports. Among the larger economies, US
exports increased to $263.7 billion in April, $2.1 billion more than March’s total. April
imports came in at $338.2 billion, $8.0 billion up on March. The monthly deficit
increased by 8.7%, to $74.6 billion. In China, cross-border trade growth picked up
to 5.1% in May, up from 4.3% in April. Export growth saw a notable increase of
7.6% in May (from 1.5% in April), largely attributed to a base effect, while import
growth during May slowed to 1.8%, down from April’s 8.4%.

Read the Global Report

Regional and Country Summary

In the advanced economies, inflation falls in the US and the UK; ECB
lowers interest rate by 25 basis points.

United States

In June the Federal Reserve decided to maintain interest rates unchanged, despite
inflation dropping to 3.3% and unemployment rising to 4%; retail sales grew less
than expected despite positive consumer confidence for the month.

In June the Federal Reserve decided to maintain interest rates unchanged, despite
inflation dropping to 3.3% and unemployment rising to 4%; retail sales grew less
than expected despite positive consumer confidence for the month.

The consumer price index registered a 3.3% (annualized) rise in May, lower than
the 3.4% inflation figure for the 12 months ending in April. Core inflation rose 3.4%
(annualized) in May. Median inflation expectations at the one-year-ahead horizon
declined slightly to 3.2% from 3.3%, according to the May Survey of Consumer
Expectations by the New York Fed. Retail and food services sales for May 2024,
adjusted for seasonal variation and holiday and trading-day differences, were
$703.1 billion—up 0.1% from the previous month. The consumer confidence index
(Conference Board) rose to 102.0 in May, from 97.5 in April (a slight upward
revision).

The industrial production index increased to 103.3 in May (102.4 April). June’s PMI
for manufacturing rose to a three-month high of 51.7, while the services PMI
increased to 55.1.

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In May, the S&P 500 rose by 4.80%, bringing the one-year return to 26.26%—its
rise for the month was perceived as steady for investors. The Dow Jones was up by
2.3% for the month, registering 17.0% annual growth. During May, the CBOE
Volatility Index averaged 13.4 (15.3 in April).

June’s meeting of the FOMC decided to maintain the target range of the federal
funds rate between 5.25% and 5.5%. The Committee will continue to monitor the
implications of incoming information around the economic outlook; however, market
investors and monetary economists still expect an interest rate cut by the end of the
year to avoid the economy tipping into recession.

April exports increased to $263.7 billion, $2.1 billion more than March’s total. April
imports came in at $338.2 billion, $8.0 billion up on March. The monthly deficit
increased by 8.7%, to $74.6 billion.

On the housing market, the 30-year fixed-rate mortgage had declined to 6.8% by
June 13, down on the previous month. Existing home sales fell by 0.7% in May.
Residential housing starts dropped to 1,277,000 in May (below April’s revised figure
of 1,352,000). Completions declined to 1,514,000 (from 1,652,000 in April).

The Congressional Budget Office’s report highlights the challenges of escalating

debt, especially higher interest costs, and the importance of managing this growing
debt burden which is expected to hit unprecedented levels. Treasury Secretary
Janet Yellen affirmed that the current $34.7 trillion national debt is manageable if it
remains proportionate to the economy’s size, despite the strain from high interest
rates. She also referenced President Biden’s strategy to cut the deficit by $3 trillion
over the next decade to stabilize the debt-to-income ratio.

China has stated that its current position with regard to US tariffs is to defend its
interests against the new tariffs announced by President Biden. These will
significantly increase duties on $18 billion worth of Chinese imports, including
electric vehicles, steel, aluminum, and other products, escalating trade tensions and
impacting bilateral cooperation.

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The Eurozone

2024 growth projected to be 0.9%; ECB lowers interest rates by 25 basis points
(bps); centrist parties remain largest force in EU parliament.

On the back of higher-than-expected growth in the first quarter of 2024—up by

0.3% quarter on quarter (0.2 percentage points above March expectations)—ECB
projections point to 0.9% growth in 2024 (revised up by 0.3 p.p.), 1.4% in 2025
(down by 0.1 p.p.), and 1.6% in 2026 (unchanged). During the remaining part of the
year, real GDP is expected to strengthen further due to improving household
incomes, foreign demand, and some recovery in business investment. The latter is
projected to broadly stagnate in average annual terms in 2024, with some recovery
expected during the year, mostly reflecting the waning but still-present drag from
past monetary policy tightening.

After nine months of holding rates steady, June 6 saw the ECB cut its key interest
rate by 25 bps to 3.75%. The Council also confirmed it would reduce the
Eurosystem’s securities holdings under the Pandemic Emergency Purchase
Programme (PEPP) by an average of €7.5 billion per month over the second half of
the year. Consequently, ECB policy has unfolded as a mix of easing (via the rate
cut) and tightening with the unwinding of the asset purchase program.

However, despite progress in tackling inflation (since September it has fallen by

more than 2.5 p.p.), domestic price pressures remain strong, with wages growth still
elevated (5.1% in 2024 Q1). As a consequence, inflation is likely to stay above
target well into next year. In April, headline and core inflation were slightly up to
2.6% and 2.9%, respectively; services inflation jumped to 4.1%. Producer prices
have been deflating since December, posting –1.0% month on month and –5.7%
year on year in April 2024. The ECB’s June projections show inflation is expected to
be 2.5% in 2024 (revised up by 0.2 p.p.), 2.2% in 2025 (up by 0.2 p.p.), and 1.9% in
2026 (unchanged). For core inflation, ECB staff projections are: 2.8% in 2024, 2.2%
in 2025, and 2% in 2026.

The eurozone’s economic recovery suffered a setback at the end of the second
quarter of the year. The forward-looking indicator, Eurocoin went from 0.26 to 0.18
in June. The composite PMI dropped to 50.8 in June (52.2 in May); the

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manufacturing PMI saw a more pronounced decrease from 47.3 in May to 45.6 in
June, while expansion in the services sector softened to 52.6 in June (down from
May’s 53.2). Looking geographically, France registered a fall in output for the
second month running.

Early June saw centrist parties hold their majority in the EU elections with the
center-right EPP taking 189 seats to remain the largest party, alongside Renew
Europe which lost seats to claim 74. The Socialists and Democrats (S&D) and the
Greens both lost seats, winning 136 and 53 respectively. The right-wing European
Conservatives & Reformists (ECR) gained seats to become the third-largest force
with 83. Meanwhile, President Emmanuel Macron has called national elections in
France for early July.

United Kingdom

CPI inflation fell to 2% in May; monthly GDP remained flat in April, following 0.4%
growth in March 2024; latest GDP projections from BoE, OECD, IMF, and OBR
indicate modest growth for 2023–25.

The OECD’s May Economic Outlook expects UK growth to remain sluggish at 0.4%
in 2024, before improving to 1% in 2025, as headline inflation drops towards the 2%
target, while core inflation remains elevated at 3.3% in 2024 and 2.5% in 2025.
Meanwhile, the Bank of England’s May Monetary Policy Report expects four-quarter
GDP growth to pick up during 2025–27. Inflation is expected to return close to
target throughout Q2 2024, before increasing slightly in Q3 and Q4, to around 2.5%.
This uptick is driven by energy price inflation, which is projected to become less
negative during Q3 and Q4 (compared with Q2). The IMF’s April World Economic
Outlook projects modest growth of 0.1% in 2023, 0.5% in 2024, and 1.5% in 2025.
Unemployment will continue increasing to reach 4.7% in 2025 as the labor market
cools. However, by 2025, the UK is tipped to be the third-best performer in the G7,
as households recover following a prolonged cost-of-living crisis.

UK monthly real GDP is estimated to have shown no growth in April 2024, following
0.4% growth in March 2024. Services output grew by 0.2% in April 2024, production
output fell by 0.9%, and construction output fell by 1.4%. Real GDP is estimated to
have grown by 0.7% in the three months to April 2024 compared with the three
months to January 2024.

The UK Consumer Price Index fell to the BoE’s 2% target in April 2024, for the first
time in three years, mainly driven by a slowdown in food prices, but partially offset
by rising motor fuel prices. The figure marks a milestone for the UK economy after
the worst inflationary upsurge in a generation. Core inflation (which excludes

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energy, food, alcohol, and tobacco) fell to 3.5%, down from 3.9% in April. On June
20, the BoE Monetary Policy Committee voted to maintain the policy rate at 5.25%.

The UK manufacturing sector showed signs of strength in May. The seasonally

adjusted S&P Global UK Manufacturing PMI rose to 51.2, up from 49.1 in April, its
highest reading since July 2022 but a tick below the earlier flash estimate of 51.3.
The headline PMI has posted above the neutral 50.0 mark in two out of the past
three months. Output expanded at its quickest pace in over two years on the back
of improved intakes of new work. The outlook also brightened as manufacturers’
positive sentiment rose to its highest level since early 2022.

The S&P Global UK Services PMI posted above the neutral 50.0 mark in May for a
seventh consecutive month, signaling a sustained expansion in output across the
UK’s services economy. The headline indicator did fall, however, to 52.9, from
April’s 11-month high of 55.0, pointing to a softer rate of expansion that was also the
slowest since last November. The headline UK Construction PMI (a seasonally
adjusted index tracking changes in total industry activity) posted above the 50.0 no-
change mark for the third month running in May, to signal sustained expansion in
activity midway through the second quarter of the year. The index rose to 54.7 from
53.0 in April, pointing to a marked increase in activity that was the fastest for two
years.

Growth in average total pay was 5.9% in the three months to April 2024; real total
pay rose by 2.2%. UK unemployment was estimated at 4.4% over that period. The
UK economic inactivity rate for February to April 2024 (22.3%) is above year-ago
estimates (February to April 2023) and rose in the latest quarter. The estimated
number of vacancies in March to May 2024 was 904,000, a 1.3% drop of 12,000
from December 2023 to February 2024. Vacancies declined for a record 23rd
consecutive period, falling in nine of the 18 industry sectors.

Party leaders released their manifestos ahead of the general election on July 4. The
Conservative Party pledges to cut taxes and reduce immigration, while the Labour
manifesto promises not to raise corporation tax, and to launch a new industrial
strategy.

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In emerging economies, China’s growth remains steady; India’s

strong momentum continues; inflation rises in Brazil amid
flood disaster.

China

In May, China’s economy showed improvements in new social financing and trade,
demonstrated stability in industrial production and investment activities, and
continued to face challenges in the real estate sector.

China’s industrial output in May recorded a stabilized year-on-year growth of 6.2%,

experiencing a slight decrease from April’s 6.3%. By sector, manufacturing output
grew by 6.7%, a decline from 6.9% in April; utility output expanded by 6.2%,
marginally down from 6.6% in April; and mining output rose by 2.0%, an increase
from 1.7% in April.

The growth in fixed-asset investment stabilized at 3.5% in May, slightly down from
3.6% in April. By sector, manufacturing investment growth was at 9.4% (compared
to 9.3% in April); infrastructure investment expanded by 4.9% (down from 5.1% in
April); and the contraction in real estate investment deepened to −11.8% (from
−10.2% in April).

In May, the slowdown in the real estate market continued. Demand-side indicators
revealed a decrease in sold floor space for new residential properties of −19.0%,
deteriorating from −17.1% in April; meanwhile, the average new home price fell
−4.3%, declining from a −3.5% drop previously. On the supply side, floor space
started was down −22.2% (−13.7% in April).

New social financing recovered to RMB 2.1 trillion in May, rebounding from a
negative new credit of RMB −0.1 trillion in April, marking a 32.7% year-on-year
growth. A significant portion of this increase compared to last year stemmed from
expanded new government bond issuance.

In May, the overall surveyed urban unemployment rate remained unchanged at

5.0%. The youth unemployment rate decreased to 14.2% in May (14.7% in April).

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Cross-border trade growth picked up to 5.1% in May, up from 4.3% in April. Export
growth saw a notable increase of 7.6% in May (from 1.5% in April), largely
attributed to a base effect, while import growth during May slowed to 1.8%, down
from April’s 8.4%.

Consumer price inflation held steady at 0.3% in May, while producer prices deflated
at a slower rate of −1.4%, improving from −2.5% in April.

FDI inflows into China decreased further, with a 28.2% year-on-year decline in the
first five months of 2024, according to data from the Ministry of Commerce.

China has progressively announced the implementation of a visa-free policy

allowing passport holders from 12 European countries, Australia, and New Zealand
to stay in China for up to 15 days. According to a Foreign Ministry spokesperson,
this initiative is designed to “facilitate the high-quality development of exchanges
between Chinese and foreign personnel and enhance high-level openness to the
international community.”

Both the EU and US have unveiled plans to increase tariffs on electric vehicle
imports from China. The EU will raise the tariff from 10% to up to 48%, while the US
will quadruple the tariff from 25% to 100%.

India

Expansion continues, led by manufacturing and services sectors. Central bank

remains cautious despite tight labor market and decelerating inflation. Financial
markets vibrant as equity indexes reach new highs.

Strong momentum in economic activity continues, especially visible through

industrial production, which is growing at 5% year over year. The biggest production
increases were observed in manufacturing and electricity production.

The PMIs for both the services and manufacturing sectors registered continued
expansion. The services PMI climbed to 60.4 in June (flash estimate) from 60.2 last
month, while the manufacturing PMI rose to 58.5 (57.5 in May)—both well above
the neutral 50 mark.

The manufacturing sector continues to show resilience with increasing new orders,
especially those originating abroad. Production also increased despite a reduction
in working hours due to the heat wave. A similar story can be seen in the services
sector, where output and new orders also continue to rise. However, the picture is
not entirely rosy, with companies reporting that both their input and output prices

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have increased, which could herald another wave of price hikes in the economy.

The inflation story has remained broadly the same over several months. Headline
inflation has been oscillating around 4.7%; however, its momentum (three-month
change annualized) has declined significantly and now points toward no price
increases. The main factor underlying price increases remains food prices, which
are growing at 8%, way above the core inflation rate, which stands at 2.9%. There
has been a gradual deceleration in core inflation (which excludes food and energy),
seen both in the year-over-year change and in terms of three-month momentum.

Looking more closely at labor markets, we see that tightening continues. The
unemployment rate has stayed broadly stable, while demand for workers has
increased. Job openings have risen slightly and remain at historically elevated
levels.

Both of these factors are driving strong, albeit slightly decelerating, consumer
activity. Data from the Retailers Association of India showed that retail sales growth
was 3% year over year, a small slowdown compared to previous months. A similar
story can be seen in motor vehicle sales.

The financial side of the economy looks strong and vibrant. Equity indexes are
reaching new highs every month. At the same time, the Reserve Bank of India (RBI
—India’s central bank) has kept rates interest rates unchanged, given the tight labor
market and decelerating inflation.

However, zooming in on the yield curve, we can observe that it has been flat since
2023. Investors expect a return of 7% across the whole spectrum of years. On the
one hand, this might indicate worries around inflation; on the other, it might reflect
concerns about growth.

India’s 2024 general election results delivered Prime Minister Narendra Modi a third
term but with a reduced parliamentary majority. This potentially makes it difficult for
the government to push through major reform measures. Businesses and investors
expect the new Modi administration to ensure political stability and policy continuity
in the world’s largest democracy and most populous country, which is also the
fastest-growing major economy globally.

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Brazil

Inflation rose for the first time in eight months and Copom held the Selic rate; the
composite PMI declined marginally.

Inflation increased to 3.93% (3.69% in April), registering its first rise in eight months
to move away from the 3.5% target set by the Banco Central do Brasil. Driven
mainly by food and energy costs, this uptick represents a pause in the
disinflationary process that started in 2023. Currently, the disaster in the southern
state of Rio Grande do Sul is pushing up food prices. Heavy rains caused extensive
flooding in this agricultural powerhouse region, known for rice, wheat, soy, and
tobacco production. The extreme weather has been attributed to above-average
temperatures, high humidity, and strong winds.

The Copom meeting on June 19 left the Selic rate unchanged, at 10.50%. Copom
decided to halt the cycle of interest rate cuts due to slower-than-expected
disinflation. This was a unanimous decision among its nine members, in light of a
recent rise in the US dollar and greater economic uncertainty. Year-end
expectations for the Selic rate have been increasing in recent months, up from 9.0%
at the beginning of the year to 10.5% in June.

Consumer confidence remains below the neutral 100 mark. It fell 4.0 points to 89.2
in May (93.2 in April) to reach its lowest level since April last year. Business
confidence edged up from 95.6 in April to 95.8 in May.

Brazil’s PMI for manufacturing fell to 52.1 in May (55.9 in April) but stayed above
the neutral 50 mark for a fifth month running, indicating moderate expansion. The
decline is attributable to floods in Rio Grande do Sul state, business closures, and
demand reduction that curbed sales growth and stifled production. The latest results
recorded the fastest increase in input costs for 21 months, but a slower rise in
selling charges. New orders increased in May, which firms attributed to advertising
and the successful launch of new products.

May saw the services PMI increase to 55.3 (from 53.7 in April) as new business

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placed with services companies in Brazil climbed. The rate of expansion was
marked, the fastest in 22 months. The composite PMI fell marginally from 54.8 to
54.0 in May, staying firmly within the expansion zone for an eighth consecutive
month.

On the financial markets, the monthly average exchange rate was BRL 5.14 per US
dollar in May (5.12 in April). In May, the Bovespa equities index declined, losing
5.4% in value. The balance of trade registered a May surplus of US $8.5 billion,
compared to $9.0 billion in April.

Meanwhile, the three-month moving average unemployment rate decreased slightly

to 7.5% in April (7.9% in March), down for the first time this year, and lower than the
same period last year (8.5%).

Russia

Q1 GDP revised upwards; growth maintains momentum in late spring; inflation

continues upwards trend; tax reforms announced amid continued fiscal expansion.

Official estimate revises annual growth to 5.4% in Q1 2024, up from 5.1% year on
year in Q4 2023. In sequential and seasonally adjusted terms, growth accelerated
to 1.1% quarter on quarter in Q1 from 0.8% in Q4. Household consumption and
government spending are still expected to drive further expansion this year.

High-frequency data have pointed to growth retaining momentum in late spring.

Government support and orders have remained the main driver of industrial activity.
April’s total output indicator expanded 5.5% year on year, up from 5% in March.
With annual growth at 3.9%, industrial production growth remained nearly the same
as in March. The PMI for manufacturing was 54.4 in April, just above a three-month
low of 54.3, signaling further moderate development. Buoyant consumer lending
and a very tight labor market continue to fuel household demand, which remains
overheated, despite tight monetary policy. While annual retail sales growth slowed
to 8.3% from 11.1%, it was subject to a base effect and does not necessarily reflect
cooling demand. Indeed, retail sales volumes have increased by 3.2% month on
month.

May’s headline inflation jumped to 8.3% year on year, from 7.8% in April. Buoyant
wage and consumer loan growth are the main factors driving up prices. The central
bank, which has held its key interest rate at 16% since December, decided to
maintain its policy in June, noting that a possible rate hike might be forthcoming at
its next meeting at the end of July. The Central Bank of Russia board acknowledged
that demand continues to rise so fast that supply cannot keep pace. Inflationary

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pressures can be further raised by risks related to foreign trade trends and vast
government subsidy programs potentially leading to further credit expansion.

The federal budget deficit for January–May was about 0.5 % of GDP, with both
spending and revenues growing substantially. Recently, the government has revised
its annual 2024 deficit target to 1.1% of GDP from 0.9%, based on a corresponding
increase in the annual spending target. In May, the government submitted to
parliament draft changes to the tax legislation, outlining a switch to a more
progressive personal tax scale and a profit tax hike in 2025. The measures are
seen as generating 1.4% of GDP in extra revenue, intended to help finance new
national projects. The reform is expected to be growth-neutral.

Economic policy is expected to remain unchanged during President Putin’s latest

term (he was inaugurated on May 7), with the wartime economy the main priority.
May’s presidential decrees outlined national goals similar to the previous set and
emphasized economic self-sufficiency: for example, a reduction in the volume of
imports to 17% of GDP and Russia gaining technological independence.
Additionally, a new set of development goals for the period 2025–30 has been
announced, with content similar to earlier ones, except for prioritization of specific
technology fields.

Read the Critical Trends and Risks Report

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by Jeffrey Condon, a senior expert in McKinsey’s Atlanta office; Krzysztof

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Kwiatkowski is an expert in the Greater Boston office; and Sven Smit, a senior
partner in the Amsterdam office.

The authors wish to thank Nick de Cent, as well as José Álvares, Cristina
Barrantes, Darien Ghersinich, Ricardo Huapaya, Yifei Liu, Marianthi Marouli,
Tomasz Mataczynski, Frances Matamoros, Jose Maria Quiros, Erik Rong, Nikol
Vargas, and Sebastian Vargas for their contributions to this article.

The invasion of Ukraine continues to have deep human, as well as social and
economic, impact across countries and sectors. The implications of the invasion are
rapidly evolving and are inherently uncertain. As a result, this document, and the
data and analysis it sets out, should be treated as a best-efforts perspective at a
specific point of time, which seeks to help inform discussion and decisions taken by
leaders of relevant organizations. The document does not set out economic or
geopolitical forecasts and should not be treated as doing so. It also does not
provide legal analysis, including but not limited to legal advice on sanctions or
export control issues.

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