Economic data released in November in the US, China, Europe and Australia were mostly firmer than expected adding to the risk that the fight to bring down inflation is not over. Donald Trump’s victory in the US presidential election extending to Republican control of the House and Senate also seems to herald a mix of US economic policies likely to add to inflation pressure around the world. Major central banks, including the US Federal Reserve, mostly continued to cut official interest rates in November although indicating no rush to keep cutting rates. The RBA remained at odds with central banks overseas, continuing a now one-year hold of the cash rate at 4.35% amid concern that Australian inflation will not fall inside 2-3% target band consistently until late-2026, and indicating little likelihood of any rate cut before mid-2025.
In the United States, the advance reading of Q3 GDP showed 2.8% real annualised growth economic growth with strong support from consumption spending up at 3.7% annualised pace in Q3. Growth continues above long-term pace in the US and key leading economic indicators released in November took a stronger turn. The Conference Board’s consumer confidence index rose in October to 108.7 from 99.2 in September. The ISM non-manufacturing (services sector) purchasing managers’ index lifted to a very strong 56.0 reading in October from 54.9 in September.
Consumption spending in Q4 is off to a strong start with October retail sales, up 0.4% m-o-m, after an upwardly revised +0.8% in September. Helping to support US consumption spending wages continue to grow in real terms. In October, average hourly earnings rose by 0.4% m-o-m, 4.0% y-o-y. While employment growth suffered a hit in October – non-farm payrolls up only 12,000 after lifting 223,000 in September - because of the back-to-back late season hurricanes battering the Southeast, the unemployment rate stayed low at 4.1% in October.
The next Trump Administration when it takes power in late-January 2025 will preside over a US economy growing above trend, stretching a still tight labour market and with progress reducing inflation showing signs of stalling. Annual CPI inflation rose in October to 2.6% y-o-y from 2.4% in September. The Trump policy package cutting immigration, imposing trade tariffs and cutting taxes is likely to underpin US inflation. The Federal Reserve delivered a second rate cut at the November FOMC meeting, but only 25bps to 4.75% and with guidance that there is no hurry reducing rates further.
In China, economic indicators released in November were mixed strength. On the stronger side, the various October manufacturing and service sector purchasing manager indices were all above 50 (the expansion/contraction marker) and notably the Caixin services PMI rose to 52.0 from 50.3 in September. Also, on the stronger side exports in October rose 12.7% y-o-y up from 2.4% in September; retail sales rose 4.8% y-o-y from 3.2% in September; and the unemployment rate edged lower in October to 5.0% from 5.1% in September. However, several October economic readings still show an economy struggling with excess capacity, especially in the property sector. CPI inflation fell 0.3% m-o-m and was up only 0.3% y-o-y; producer prices fell 2.9% y-o-y; and house prices fell 5.9% y-o-y. The authorities announced further stimulus measures in November, essentially a debt swap arrangement worth 2 trillion yuan ($US 276 billion) each year over the next three years taking hidden debt off local government authorities. The problems besetting China’s population and limiting willingness to spend including inadequate social welfare support, lack of job security and the damage to household wealth from falling property prices and are barely addressed in the latest stimulus package. Any further stimulus measures may be delayed until the authorities see what they may have to deal with in terms of tariff increases on China’s exports to the US expected to be imposed by the incoming Trump Administration. China’s economic growth prospects remain soft although not quite as bad as they seemed earlier this year.
In Europe, GDP growth was little better in Q3 with GDP up 0.4% q-o-q, 0.9% y-o-y compared with +0.2% q-o-q, +0.6% y-o-y in Q2. Germany remains one of the softest economies in Europe hamstrung by legal limits on budget spending. Notwithstanding soft economic growth, Europe’s labour market remains tight with the EU unemployment rate holding at 6.3% in September, the lowest level this century. Inflation is showing signs of stickiness with the CPI lifting to 2.0% y-o-y in October from 1.7% in September and the core CPI holding at 2.7% y-o-y in both September and October. The European Central Bank has been one of the more aggressive central banks cutting interest rates with the latest 25bps cut in October, taking the deposit rate down to 3.25%. This is the third rate cut in the current cycle from the ECB. The pace of cutting seems likely to slow as the ECB becomes torn between economic weakness in Europe’s biggest economy Germany and signs that inflation may rekindle in 2025.
In Australia, economic releases in November show some signs of lifting economic growth, falling headline inflation but still too high underlying inflation and a still very tight labour market. The RBA at the Board meeting in early- November left the cash rate unchanged at 4.35% and indicated that likely progress reducing inflation would remain slow and implied no cut in the cash rate until mid-2025. The RBA’s latest economic forecasts released in the quarterly Monetary Policy Statement showed that the RBA still expects that it will be late-2026 before inflation falls consistently towards the middle of the RBA’s 2-3% target band. While the RBA can cut rates before that time it will need solid evidence in economic data reports to confirm that inflation is on track.
Essentially, even though the Australian economy is growing slowly, demand in the economy continues to outstrip capacity to produce. On the demand side, it is mostly public spending that is growing too fast – at more than 4% y-o-y in real terms. There is little indication that growth in spending in the public sector will slow, possibly the opposite, heading into a federal election next year.
Growth in private sector spending has been weak but maybe on the turn stronger. Retail sales rose in real terms by 0.5% q-o-q in Q3 after falling 0.4% in Q2. The Westpac consumer sentiment survey showed back-to-back increases in October, +6.2% m-o-m, and November, +5.3%. Real household disposable income is starting to rise sharply on a combination of real wage growth (wages up 3.5% y-o-y in Q3 against a CPI increase of 2.8% y-o-y), the income tax cuts that came in on July 1st, and stable interest rates over the past year with competition in the home lending market allowing an opportunity of lower rates for those prepared to refinance. The strong labour market is also supporting household income. In October, employment was up 2.7% y-o-y, hours worked was up 2.5% y-o-y and the unemployment rate was steady at a still low 4.1%.
It is hardly surprising that the RBA’s primary focus is still to make sure that inflation is contained. The fall in annual CPI inflation to 2.8% y-o-y in Q3 and technically inside the RBA’s 2-3% target band was generated mostly by government subsidies pushing down electricity prices 17% y-o-y in Q3. When the subsidies end in mid-2025, electricity prices will jump and push up CPI inflation above 3% (to 3.7% y-o-y by end-2025 in the RBA’s latest forecasts).
If Australian private sector demand strengthens and President-elect Trump’s policy program adds to inflation everywhere in 2025 the risk is that Australian inflation lifts more in 2025 than the RBA is forecasting currently. We still see some hope of an Australian cash rate cut in mid-2025, but it is hope that is showing signs of fading.