Economic data released in September again show soft global economic growth and slow progress reducing inflation. Several central...
Economic data released in September again show soft global economic growth and slow progress reducing inflation. Several central banks reduced official interest rates, including the US Federal Reserve for the first time this cycle and by 50bps taking the Funds rate down to 5.00%. The European Central Bank delivered a second set of interest rate cuts in the current cycle and the Peoples’ Bank of China delivered rate and banking reserve ratio cuts as part of a stimulus package to try and improve the growth prospects of China’s flagging economy. Australia’s RBA remains an odd-man-out holding its cash rate at 4.35% in September and still indicating no rate cuts for at least the remainder of this year. The RBA’s continuing focus on reducing inflation goes against the tide of a change in focus by many other central banks towards priming growth and employment rather than going the last mile to bring inflation down to their respective targets.
In the United States, economic growth appears softer on several economic indicators although Q2 GDP growth was revised up in September to 3.0% annualised and Q3 GDP trackers are pointing to around 3% growth again which if achieved means the US economy continues to grow above long-term trend. Most leading economic indicators reported in September were comparatively firm except for the manufacturing purchasing manager (August ISM manufacturing PMI up to 47.2 from 46.8 in July but below the 50 expansion/contraction marker). In contrast, the August ISM non-manufacturing (services) sector PMI was in expansionary territory and rose slightly to 51.5 from 51.4 in July. Most leading housing activity indicators were firm too with August building permits up 4.9% m-o-m and housing starts up 9.6% m-o-m.
The mainstay of growth in the United States is household spending and that appears to be holding relatively firm as well. August retail sales were up by 0.1% m-o-m consolidating a 1.1% increase in July. While labour market conditions vary in different parts of the country, overall conditions remain firm. Non-farm payrolls rose by 142,000 in August after lifting a downwardly revised 89,000 in July. Average hourly earnings up 0.4% m-o-m, 3.8% y-o-y in August are running ahead of US inflation (August CPI 2.5% y-o-y). Also, the unemployment rate edged down a notch in August to 4.2% from 4.3% in July.
The Federal Reserve is starting to worry that monetary policy is too restrictive and could tip growth and employment weaker. Before the 50bps rate cut at the Fed’s September policy meeting the 5.50% Fed Funds rate sat three percentage points above CPI inflation. While progress seems to be slowing reducing inflation to the Fed’s 2% target, the Fed funds rate even at the current 5.0% is high and the Fed is indicating cuts taking the rate down to 3.5% over the next year. That order of rate cutting, however, would run the risk of the US economy continuing to grow above trend through the remainder of this year and next year with inflation rekindling.
In China, most economic indicators released in September show a weak economy still besieged by the long-running property sector downturn and low and weakening consumer sentiment. August economic readings show fixed asset investment spending moderating to 3.4% y-o-y from 3.6% in July; industrial production 4.5% y-o-y from 5.1% in July; retail sales 2.1% y-o-y from 2.5% in July; and the unemployment rate up to 5.3% from 5.2% in July. By far the weakest part of China’s economy is the residential property sector. According to the official data, house prices fell 5.3% y-o-y in August, which was worse than the 4.9% fall in July. The authorities seem to be acting if rather belatedly to try and shore up China’s poor economic growth prospects. The Peoples’ Bank of China reduced all its official interest rates 20bps and also cut the Reserve Ratio Requirement for banks by 50bps to 9.5%. Also, 2 trillion yuan ($US284 billion) of special stimulus bonds will be issued to fund various projects to be detailed. Restrictions on home purchase in China’s bigger cities are also set to be reduced. The problems besetting China’s property sector remain substantial, but at least there are signs that the authorities are turning their attention towards trying to remedy some of the issues.
In Europe, the European Central Bank is starting to focus on supporting growth. Inflation, down to 2.2% y-o-y in August and close to the ECB’s 2% target, is providing some leeway for the ECB’s pivot towards supporting growth. Also, while Europe’s labour market is still tight with the unemployment rate at a quarter century low of 6.4% in July, wage cost pressures seem to be diminishing with Q2 wages up 4.5% y-o-y and down from 5.2% y-o-y in Q1. GDP. At its September policy meeting the ECB cut the deposit rate by 25bps to 3.50% but also cut by a larger amount its marginal lending facility rate, by 60bps to 3.90%. In the United Kingdom, GDP growth has improved reducing the urgency for the Bank of England to cut interest rates. The Bank left the base rate unchanged at 5.00% at its September policy meeting but indicated a rate cut would occur in November.
In Australia, the RBA held the cash rate at 4.35% at its September policy meeting and indicated that any rate cut is still several months away and contingent on progress containing inflation. One less hawkish sign was that the RBA Board did not discuss a possible rate hike at the meeting, a change from the previous two meetings when a possible rate hike was discussed. After the RBA meeting the August monthly CPI was released showing annual CPI inflation down to 2.7% y-o-y from 3.5% in July and inside the RBA’s 2-3% target band for the first time since early-2021. Underlying inflation, however, as measured by the trim mean, while down in August to 3.4% y-o-y from 3.8% in July is still above target and likely to stay above target through the remainder of this year and next year.
The story of headline CPI inflation falling inside target band in August is one of temporary effects – falling petrol prices (-7.6% y-o-y in August) and more particularly falling electricity prices (-17.9% y-o-y in August) because of the various government electricity rebate schemes. These falls will flatten and possibly reverse over the next year or so, taking CPI inflation back above 3%. The RBA is wary about starting to cut the cash rate with inflation at risk of rekindling. A continuing tight labour market is adding to that wariness. Employment continues to grow strongly, up 47,500 in August after increasing 48,900 in July and the unemployment rate is steady at 4.2% in both July and August.
Set against the potential stickiness of inflation, Australia’s GDP growth rate is soft, up only 0.2% q-o-q in Q1 and Q2 and that growth supported mostly by government spending. Factors suppressing household spending – higher taxation in 2023-24 and higher borrowing interest rates – are flattening in 2024-25 or reversing in the case of taxation and that leans the odds in favour of stronger economic growth. However, the outlook is subject to greater than usual uncertainty meaning that the RBA is data watching to check whether its latest (early-August) economic forecasts implying inflation slowly returning consistently within target by mid-2026 are on track. If they are on track in the next set of forecasts to be released in early November, the RBA could start slowly cutting the cash rate in the first half of 2025.