Economic data released in January show that global economic growth likely finished 2024 on a firming note. The advance US Q4 GDP report is due later this week and is expected to show above trend growth running around 2.7% annualised pace. Europe’s Q4 GDP is out this week too and is likely to show annual growth around 1.0% y-o-y, not particularly strong but at least not in recession. China has already reported stronger-than-expected growth at +1.6% q-o-q, +5.4% y-o-y. Australia’s Q4 GDP report is not due until March, but October and November economic readings point to annual growth pushing above 1.0% y-o-y (it was 0.8% in Q3 2024). US policy in the early days of the Trump Administration is shaping up pro-US growth, albeit at a potential cost to growth outside the US. China appears to have pro-growth policy initiatives in reserve to deploy once US policies affecting international trade become clearer. The policy outlook is cloudy in Europe but could shift pro-growth if major impediments such as Germany’s restrictions on the size of the government budget position ease. Australia is heading to an election by mid-May and government spending is rising.
On balance, firming global economic growth late in 2024 looks set to continue in the first half of 2025 but that could halt and start to reverse progress made containing inflation. In Most major economies and especially in Australia labour markets remain tight generating growth in wages above inflation. Where productivity is improving, such as in the US, stronger growth and a tight labour market may produce less inflation pressure, but in Europe and Australia where labour productivity growth is mostly non-existent or even still declining, there is risk of higher inflation returning through 2025.
Central banks mostly reducing official interest rates through 2024 are likely to limit further rate reductions and later in 2025 may start warning of higher official interest rates in 2026. In the case of the RBA where cash rate cuts have not started the scope to cut the cash rate is limited through the first half of 2025 and by the end of this year, the RBA too is likely to be warning of higher interest rates ahead in 2026.
Returning briefly to the US, economic reports released in January are consistent with firm growth and stalling progress reducing inflation. At the leading edge, purchasing manager reports were firm with the ISM manufacturing report lifting to 49.3 from 48.4 in November and the ISM non-manufacturing (services) sector report lifting to 54.1 from 52.1. Retail sales rose in both November, +0.8% m-o-m, and December, +0.4% m-o-m, indicating a continuing strong contribution to GDP growth from consumer spending. Real wages continue to grow in the US, December average hourly earnings were up 3.9% y-o-y, against the December CPI up 2.9% y-o-y. It is worth noting the recent low-point for annual US CPI inflation was 2.4% y-o-y in September and it has been rising since.
Essentially, the tight US labour market with non-farm payrolls rising briskly - up 256,000 in December after lifting 212,000 in November – and the unemployment rate edging lower in December, down to 4.1% from 4.2% in November, means that even with strong productivity US inflation looks stuck in a groove between 2.5% and about 3% y-o-y set against the Federal Reserve’s (Fed) 2% inflation target. The Fed has reduced the Fund’s rate from a peak of 5.50% to 4.50% with the last 25bps cut occurring at the December FOMC meeting. The Fed has warned since that it has limited room to cut the Funds rate further and the policy meeting later this week may see the Funds rate left on hold at 4.50%. We see at most another two Fed rate cuts over the next 6 months or so. Beyond that risk of rekindling US inflation breaking out of the 2.5% to 3.0% groove implies the Fed considering rate hikes and probably starting early next year.
Turning to China, there are some signs of firming growth even with the drag from the weak property market. Annual GDP growth rose to 5.4% y-o-y in Q4 from 4.6% in Q3. Firmer December reports showed exports, +10.7% y-o-y from +6.7% in November; industrial production, +6.2% y-o-y from +5.4% in November; and retail sales, +3.7% y-o-y from +3.0% in November. The authorities have indicated that they are considering policies to prime domestic spending and have those in reserve once they see the scope of restrictions that new US Administration may impose on China’s exports to the US. The recent improvement in China’s export growth may be China accelerating export shipments ahead of future restrictions. However, the possibility of stimulatory measures by China aimed at priming domestic demand improve the likelihood of stronger Chinese growth ahead.
In Europe, growth is slow paced – worse in the power-house French and German economies – but better in earlier problem economies such as Italy, Greece and Ireland. European Q4 GDP is out later this week and is likely to show annual growth at 1.0% y-o-y, slightly better than 0.9% y-o-y in Q3. The European labour market remains tight, a reflection of labour-intensive services remaining the mainstay of what growth there is in Europe. The unemployment rate is sitting at a quarter-century low point of 6.3% and wage growth is running above 4% y-o-y against a December CPI inflation rate of 2.4%. Strong real wage growth is priming saving rather than spending, but that could change in favour of spending if European economic policies turn pro-growth. The ECB is doing its part and has brought the deposit rate down to 3.00%. It may deliver another 25bps cut to 2.75% at the policy meeting later this week. But the scope to cut rates more beyond is becoming limited as Europe’s inflation rate becomes sticky above the ECB’s 2% target inflation rate.
In Australia, economic reports released in January indicate stronger economic growth in Q4 and some moderation in inflation. There is some scope for the RBA to start cutting the cash rate but tempered by the growing prospect of rekindling inflation later in 2025 and in 2026. At present, the RBA does not have rekindling inflation in its economic forecasts, but several recent economic reports indicate that it should make that change.
Retail sales and household spending reports for October and November point to noticeably stronger growth in household consumption spending in Q4. Retail sales rose 0.8% m-o-m in November after increasing 0.5% in October, while household spending lifted 0.4% m-o-m in November after an out-sized 0.9% increase in October. Even if the December reports are not as strong, real Q4 household consumption spending looks set to rise at least 0.5% q-o-q, much better than 0.0% in Q3 and -0.3% in Q2.
This better growth in household consumption spending is likely to coincide with still very strong growth in government spending. The growth in these two spending groups alone implies a noticeable lift in GDP in Q4 when the figures are released in March.
Stronger growth will stretch further the already tight labour market. In December employment rose 56,300, taking employment growth in 2024 to 444,400, up 3.1% y-o-y. The unemployment rate fell in December to 3.9%, down from 4.0% in November and unchanged from December 2023. Wage growth running at 3.5% y-o-y in Q3 2024 is more likely to rise unless the unemployment rate rises very soon to 4.3% to 4.5% - increasingly unlikely based on recent reports of growing demand in the economy.
On the back of very weak Australian domestic demand through the first half of 2024 plus government subsidies pushing down electricity prices, inflation moderated through the second half of 2024. The Q4 CPI is out on Wednesday and is expected to show that the annual headline CPI inflation rate fell from 2.8% y-o-y in Q3 to around 2.5% y-o-y in Q4. Trimmed mean, or underlying inflation is also expected to fall to around 3.3% y-o-y from 3.5% y-o-y in Q3. At face value, if inflation comes in as expected, or less, the RBA could consider cutting the cash rate at the mid-February policy meeting. But there are reasons why inflation will not stay down and will rekindle down the track and that is why any rate cuts the RBA delivers are unlikely to last more than a few months.