What in the World! October 2024

Global Economy

• Global growth is expected to remain stable yet underwhelming. As disinflation continues, a smooth landing is within reach. However, the balance of risks is tilted to the downside: geopolitical tensions could flare up; sudden eruptions in financial market volatility could tighten financial conditions; problems in China’s property sector could generate global spillovers via their effect on global trade, as could rising protectionism and continued geo-economic fragmentation; and disruptions to the disinflation process could prevent central banks from easing monetary policy, adding challenges to fiscal policy and financial stability. Amid numerous threats, it is time for a policy pivot. With monetary policy easing, shifting gears on fiscal policy to ensure sustainable debt dynamics and rebuilding of buffers is appropriate. Advancing structural reforms to boost long-term growth and accelerating the green transition remains as necessary as ever.

• At 3.2 percent in 2024 and 2025, the growth projection is virtually unchanged however, notable revisions have taken place beneath the surface, with upgrades to the forecast for the United States offsetting downgrades to those for other advanced economies—in particular, the largest European countries.
• Likewise, in emerging market and developing economies, disruptions to production and shipping of commodities—especially oil—conflicts, civil unrest, and extreme weather events have led to downward revisions to the outlook for the Middle East and Central Asia and that for sub-Saharan Africa.
• These have been compensated for by upgrades to the forecast for emerging Asia, where surging demand for semiconductors and electronics, driven by significant investments in artificial intelligence, has bolstered growth.
• The latest forecast for global growth five years from now––at 3.1 percent—remains mediocre compared with the prepandemic average. Persistent structural headwinds—such as population aging and weak productivity—are holding back potential growth in many economies.
• Cyclical imbalances have eased since the beginning of the year, leading to a better alignment of economic activity with potential output in major economies. This adjustment is bringing inflation rates across countries closer together and on balance has contributed to lower global inflation.
• Global headline inflation is expected to fall from an annual average of 6.7 percent in 2023 to 5.8 percent in 2024 and 4.3 percent in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies. As global disinflation continues to progress, broadly in line with the baseline, bumps on the road to price stability are still possible.
• Goods prices have stabilized, but services price inflation remains elevated in many regions, pointing to the importance of understanding sectoral dynamics and of calibrating monetary policy accordingly.
• Global trade exhibited a continued gradual expansion in volume and value terms in July. Global trade volumes expanded by 1.7%, y-o-y, following a rise of 2.0%, y-o-y, in June and 0.7%, y-o-y, in May. In terms of trade value, there was a y-o-y increase of 0.5% in July, reflecting a level nearly consistent with June's growth rate of 0.6%. This represents an improvement compared to May, which recorded growth of 0.2%.

• China is the latest example of how cheap valuations can turn into a stock market rally once a catalyst emerges. Chinese shares have surged since the September politburo meeting on hopes that major fiscal stimulus may be on the way. A lack of details so far has disappointed some investors, so we eye policy announcements for more clarity. This potential exists elsewhere, waiting for a catalyst to give a spark, we think. But selectivity is key.

United States

• The stock market has been on quite a run, rallying more than 12% just since early-August and extending its year-to-date return to nearly 23%.* If the S&P 500 holds on to this gain for the remainder of 2024, this will be the second consecutive year with a return of 20% or more.

Back-to-back banner years are somewhat rare:

• Since 1950, there have been five previous instances in which the stock market followed a 20%-plus annual gain with another 20% year.
• Two of them came in the 1950s, and as far as the magnitude of the gains, these were the most impressive periods, with gains of 32% and 24% in 1950-51, and then 53% and 32% in 1954-55. The next came in 1975-76, then again in 1982-83, followed by the tech bubble-phase in the late-1990s.
• Outside of those periods, there were 14 years in which the market gained 20% or more, but failed to repeat that feat. Of those instances, the market rose the following year nine times and declined five. Of the years with a gain, the average was 14%. The average loss in those five instances was 8%.
• So while 20%-plus yearly gains are common (nearly 40% of years from 1950 to 2023 had a return above 20%), back-to-back rallies of that magnitude are fairly rare. Thus, the adjoining gains last year and in 2024 (so far) should not be taken for granted.

• Stronger-than-expected economic data –?Over the past month economic surprises have improved, coinciding with the rise in rates. September's job gains were the strongest in six months and unemployment dropped, easing concerns about the state of the labor market. Moreover, the robust growth in retail sales has helped push the Atlanta Fed's real-time GDP estimate for the third quarter to 3.4%1. If realized, this would mark the second consecutive quarter of above-average growth, dispelling fears of a near-term recession that arose when the Sahm-rule was triggered by rising unemployment.
• A shift in Fed expectations –?Along with the strong economic data, markets have had to absorb a mild upside surprise in inflation, leading to expectations for a more gradual and shallower rate-cutting cycle than anticipated at the September Fed meeting. In response, bond markets have slightly repriced future rate paths. Another outsized rate cut is no longer expected, and the odds of a November quarter-point rate cut have fallen from 100% to 90%. By the end of 2025, markets now expect the Fed policy rate to be 3.5%, up from 2.9% a month ago.
• Potential for a sustained rise in productivity –?One of the reasons the U.S. economy continues to defy expectations for a slowdown is the notable uptick in productivity, a trend not observed in other major economies. The adoption of new technologies and promising innovations such as artificial intelligence (AI) have the potential to increase the long-term growth rate of the U.S. A more productive economy could sustain higher growth without fueling inflation, justifying a higher steady state for interest rates relative to the last economic expansion.
• Concerns over U.S. debt and the upcoming election –?The U.S. presidential election on November 5 is fast-approaching and is raising fiscal concerns. Based on campaign proposals, the elevated debt will likely increase further under both candidates. According to the Committee for a Responsible Federal Budget, a nonpartisan, nonprofit organization, Harris’s plan would increase the debt by $3.50 trillion through 2035, while President Trump’s plan would increase the debt by $7.50 trillion. Stimulative fiscal policy either via tax cuts or additional spending may force the Fed to leave its policy rate higher than it would have done otherwise. And the increased supply of bonds to finance the higher debt could pressure long-term Treasury yields. The election appears incredibly close, but as the odds of Trump winning edge up in the betting markets, investors are deliberating the potential impact of additional trade tariffs. Economic theory suggests that tariffs would be inflationary. However, in practice there are many moving pieces that affect how the additional cost might flow through to the consumer. Part of the increased cost could be eaten by retailers, and the potential weakening of foreign currencies relative to the U.S. dollar could make them cheaper.

• The housing market was the focus of attention in what was a light week for economic data. For the most part, the residential sector has been in a slump since the Federal Reserve started to tighten monetary policy in 2022. A higher fed funds target rate pushed up mortgage rates sharply, which exerted significant pressure on affordability for buyers already dealing with scarce supply and elevated home prices. As the summer wound to a close, green shoots began to sprout for the housing sector as mortgage rates began to decline in anticipation of less-restrictive monetary policy nearing on the horizon. After rising to almost 7% in early July, the average 30-year mortgage rate dropped to almost 6% in the final week of September, according to Freddie Mac.

• The economy expanded at a solid clip in the second quarter of the year, with real GDP growing at a 3.0% seasonally-adjusted annualized rate (SAAR) after a slower start to the year. Second quarter growth was driven by the consumer, with real personal consumption expenditures contributing 1.9 percentage points to top-line growth on the back of a strong increase in services spending. Investment was another area of strength, with the category of real equipment investment growing at a 9.8% SAAR. The housing market and the volatile net exports component were the largest drags, with residential investment subtracting 0.11 percentage points and net exports slicing 0.90 percentage points from top-line growth.
• The strength of the U.S. consumer has underpinned the economy’s apparent soft landing thus far. Data revisions in the August personal income and spending report showed consumers had a new lease on life and were not as strained as previously thought. Real consumer spending had been strong throughout the year, but August's report revised the numbers even higher for each month so far in 2024. The robust pace of spending was sustained by solid income gains, with the revised pace of income growth now outpacing spending. All told, the August revisions brought the personal saving rate up to nearly 5% when it had previously been below 3%. Thus, the consumer is on stronger standing, especially as households have not been spending at the expense of saving to the same degree as the data previously suggested. ?

• The Beige Book is a report published eight times a year by the Federal Reserve in the United States. The latest Beige Book—which covers early September through mid-October—revealed a picture of softening economic growth, with nine of the 12 regional banks reporting flat or declining activity over the month. Despite the solid economic data released over the same period, business and not-for-profit contacts highlighted underwhelming activity. Most districts reported declining manufacturing activity, mixed consumer spending data, lack of affordable housing and softening labor demand. They also highlighted elevated uncertainty, with an increased share of businesses and consumers waiting to make big financial decisions until after the presidential election in November. Despite the overall bleak picture, contacts were overall optimistic about the longer-term outlook, though still exercised caution in their hiring and investment decisions.

• Between the dockworkers' strike, Hurricane Helene and the approaching presidential election, October was a month of turbulent headlines, and the Beige Book reflected the uncertainty felt by consumers and business contacts. Contacts in districts with major port cities—such as New York, Richmond and Atlanta—reported a slight increase in cargo volumes as they accommodated additional traffic ahead of the dockworkers strike, but ultimately, the brevity of the strike caused only minor and temporary disruptions. Hurricane Helene had a more severe impact, with districts in the Southeast reporting damaged crops, pauses in business activity and tourism, and damage to infrastructure listed as the top problems. The Federal Reserve Bank of Richmond noted that the full extent of damages from the hurricane remains unclear, with economic conditions likely to be affected in the months ahead. Election uncertainty was also a common theme in this Beige Book. Contacts reported a "wait and see" mode across the districts, with employers waiting to hire, businesses waiting to invest and consumers waiting to purchase big-ticket items until the election passes.

Canada

• The Bank of Canada (BoC) cut its overnight rate by 50 basis points, to 3.75%, while stating that it will continue with normalizing its balance sheet.?
• With inflation having "declined significantly" over the last few months, the bank said it "expects inflation to remain close to the target over the projection horizon." Notably in the Bank's Monetary Policy report (MPR), the quarterly forecast for core inflation is unchanged at +2%.
• The bank highlighted the moderate pace of economic growth, stating "the economy grew at around 2% in the first half of the year and we expect growth of 1?% in the second half. Consumption has continued to grow but is declining on a per person basis." The Bank expected GDP growth to "strengthen gradually" over the coming quarters supported by lower interest rates.
• On the future path of policy, the bank noted that "if the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further." However, it also noted that the timing and pace of further reductions will be guided by the data.

• Under Trump’s proposed 10% across-the-board tariff (and assuming broad-based retaliation by Canada on U.S. imports), the Canadian economy would be hit hard.? Real GDP would fall around 2.4 ppts over 2 years relative to baseline projections.?

Europe

• The European economy is in a new phase. The European Central Bank (ECB) is now two interest rate cuts into its current rate-easing cycle, while the annual eurozone inflation rate dipped beneath the central bank’s 2% target in September. Europe has moved on from the inflationary and higher-rate environment of the past three years.
• While the ECB now appears to be on a clear rate-cutting path, recent data paints a mixed economic picture for the region. The HCOB Eurozone Services Purchasing Managers Index (PMI) figure of 51.4 for September points to a sector still in expansion mode, albeit exhibiting some signs of fading momentum.1?Meanwhile, the region’s manufacturing sector continues to bump along the bottom: the HCOB Eurozone Manufacturing PMI recorded a 45.0 reading, its lowest level in 2024, caused in part by weakness in the German and French manufacturing industries.

Eurozone Manufacturing and Services Purchasing Manager Indices (PMI) Suggest a Slowdown

• At the heart of Europe, the German economy is misfiring. Its current malaise is perhaps best symbolized by Volkswagen’s announcement in September that it is considering shutting some of its German factories, which would be the first factory closures in the automaker’s home market in its 87-year history. Falling business confidence measures suggest the German economy has misplaced its mojo. As an export nation, Germany is suffering from ongoing weak global demand, and certain core sectors of the economy are under pressure, including the autos industry. Restrictive fiscal policy and political uncertainty, largely caused by significant gains in state elections in eastern Germany by the far-right AfD party, have added to the headwinds facing Europe’s largest economy
• But the economic vista across Europe is not entirely gloomy. The annual eurozone inflation rate fell to 1.8% in September and is now below the ECB’s 2% target, as noted above. In addition, eurozone consumer confidence has continued its slow but steady recovery since the summer of 2022; GDP growth remains positive, if subdued, at 0.2% quarter-on-quarter for Q2 2024; and the euro area’s unemployment rate has ticked down to 6.4%, its lowest ever level.
• A mixed economic picture seemingly prevails. However, even if the eurozone economy is only spinning its wheels at present, we believe equity investors can draw some comfort from the recent shift in the interest rate environment.
• The ECB made its second cut of this interest rate cycle in September, from 3.75% to 3.50%, and indicated rates are on a “declining path.” Coupled with the Federal Reserve’s aggressive 50 basis points (bps) cut in US interest rates in September, we believe looser monetary policy could serve as a tailwind for European equity prices over the near term, especially since European companies and consumers are generally more rate-sensitive than many of their global counterparts. The ECB’s cuts should have a quicker influence on economic activity than those of the Fed, even if the positive effects will not be felt immediately, given the lagging nature of outcomes from monetary policy changes.
• This latest rate-cutting cycle kicked off in a historically unusual fashion in that the ECB reduced rates before the Fed—we would argue it has been more ahead of the curve than the US central bank on monetary policy. But the ECB moving first has not been the only historical anomaly of late. Normally stock markets perform poorly when confronted with flagging economic activity, which typically coincides with interest rate cuts. This time around European equities have remained resilient and have avoided hitting any air pockets, even as the eurozone economy has showed some signs of stalling and the ECB has been cutting rates.
• Looking ahead, the backdrop of falling rates could prove to be a good base for European equity markets to build upon in 2025. In particular a falling cost of capital could provide support for certain cyclical parts of the market, such as chemicals and commodity producers, where we believe valuations have become overly discounted versus the long-term potential of these businesses.
• Turning to recent corporate results, earnings have reflected the slowdown in the region. Some defensive sectors, such as consumer staples and utilities, have held up well amid easing economic momentum, while the more cyclical consumer services, autos and commodities sectors have experienced earnings downgrades.
• Another recent noteworthy market development has been companies divesting non-core assets. French pharmaceutical group Sanofi is reportedly considering bids from private equity firms for its consumer healthcare business and contemplating spinning off the unit if it cannot conclude a deal at a satisfactory valuation. Elsewhere, European companies across the autos, chemicals, and household and personal care products sectors have also expressed a desire to dispose of or spin off peripheral corporate assets.

France

• France’s economic outlook for late 2024 shows moderate growth and ongoing challenges. GDP Growth is projected at just 0.7% for 2024, with a slight increase expected in 2025 at 1.3%, driven primarily by private consumption as inflation cools. Key factors such as subdued investment and slowed export demand from trade partners continue to limit growth potential. Inflation is forecast to decrease, falling from 5.7% in 2023 to around 2.5% in 2024, as energy prices stabilize and consumer demand eases. This trend should support household purchasing power, although ongoing high public debt remains a concern, with debt projected to rise to nearly 114% of GDP by 2025
• Fitch Ratings revised France’s outlook from “stable” to “negative” while affirming its credit rating at AA-. The downgrade in outlook reflects concerns over France’s fiscal situation, specifically its widening government deficit and increasing public debt. France’s general government deficit reached 5.5% of GDP in 2023, exceeding previous forecasts, and is expected to remain elevated due to sluggish economic growth and higher interest rates. Additionally, public debt is projected to continue rising, anticipated to approach 118.5% of GDP by 2028 if current policies remain unchanged.
• Fitch cited growing fiscal pressures and political challenges in implementing effective deficit-reduction measures. This shift in outlook highlights the risks France faces in managing public finances amid modest economic recovery projections, with GDP growth expected to remain below 1% for 2024.

UK

• Inflation has been decisively trending down towards the BoE’s 2% target. Despite this progress, the central bank refrained from cutting interest rates at its September meeting—after lowering the benchmark rate to 5% in August—guided by a desire to “squeeze persistent inflationary pressures” out of the UK economy.
• Energy prices, a major contributor to inflation, have eased considerably. However, an escalation of tensions in the Middle East could disrupt global oil supply and push up prices. In the United Kingdom specifically, the energy price cap has recently risen by approximately 10%, which will certainly reverse some of the downward momentum. Meanwhile, wage inflation remains notably stronger in the UK relative to the United States and Europe. Above-inflation public sector wage increases have kept wage inflation sticky.

UK Wage Growth Is Trending above the United States and Europe

• Although the government does not directly control interest rates, it has inadvertently influenced the rate environment through its wage agreements. This complex interplay between government policy and central bank decision-making might garner more international attention in the coming months, particularly as we approach the UK Budget announcement on 30 October.
• Whilst the BoE decided to keep rates unchanged at 5% by a vote of 8-1—a seemingly hawkish stance—a sharp fall in the growth of prices for services suggests other domestic price pressures are easing, likely paving the way for further cuts ahead. The UK economy is primed to build on positive momentum quickly as households benefit from positive real income growth and relatively low unemployment. Coupled with high household savings, any further rate cuts could spark meaningful spending growth, boosting consumer-focused stocks.

Japan

• Evidence of improvement is emerging in the Japanese economy: After a contraction in the first quarter, real gross domestic product rebounded by 0.7% in the second quarter of 2024, thanks to strong domestic demand. Consumer spending grew 0.9% from the previous quarter, while both residential and nonresidential private investments picked up. Year over year, consumer spending returned to growing ways, while exports contracted for the first time since 2020. Clearly, the driver of Japan’s economic growth is shifting from external to domestic demand.
• The resurgent Japanese stock market saw the Nikkei 225 Index finally surpass its 1989 peak this year. A pick-up in Japanese inflation has allowed companies to lift prices, potentially boosting revenue and earnings, while rising wage costs may be offset by greater consumer propensity to spend. Increased government spending and export growth also underpin the case for Japanese equities.
• The yen continued to appreciate slightly in September: A stronger currency will lower the cost of imports, notably for food and energy. The import price index in August was up just 2.6% from a year ago, after rising by 10.8% in the previous month, signaling that imported inflation has responded quickly to the stronger yen.
• Further appreciation of Japan’s currency will largely depend on policymaker decisions in both Japan and the United States. The Bank of Japan kept rates steady at its September meeting but has signaled a willingness to eventually raise rates to 1%, up from around 0.25%.?The new leader of Japan’s ruling party, Shigeru Ishiba, is seen as an inflation hawk and supportive of additional interest rate increases. As a result, Japanese equity markets fell when trading resumed following his win. However, he is expected to maintain the Bank of Japan’s independence, which would prevent him from intervening in monetary policy. Plus, he has since stated that interest rates are not yet ready to rise further.
• The other major challenge to stronger consumer spending is that inflation continues to run hot. Headline inflation was up 3% from a year earlier in August, an acceleration from 2.7% in July?

• Japan’s engine of economic growth is already switching from exports to consumer spending. A rapid rise in wages has finally given households the purchasing power they need to spend more. A stronger yen should also help alleviate some inflationary pressures, which will further bolster consumer spending. However, inflation is likely to remain elevated in the near term, which will keep the pace of spending relatively modest. A more hawkish monetary policy stance in the United States as well as a reversal of wage gains are risks that could further hinder Japan’s nascent recovery.

China

• The continued slowdown in consumer demand and deeper contraction in the housing sector in August prompted a new round of policy interventions. The Chinese government previously indicated its willingness to implement direct measures in response to these challenges, which is now reflected in the latest interventions, including large-scale fiscal and monetary actions.
• The recent robust fiscal and monetary stimulus measures introduced by the Chinese government have already been largely anticipated and considered in this forecast, based on the pattern of government measures observed during previous economic downturns. This stimulus is expected to enhance consumer spending through a combination of lower interest rates, reduced RRRs to increase liquidity, and voucher programmes aimed at stimulating consumption.
• However, the housing sector will likely decline due to an ongoing supply overhang. Initiatives such as converting existing apartments into social housing, lowering mortgage rates, and reducing down payment requirements for second-time homebuyers may help moderate the decline in housing prices. Nonetheless, the government's broader goal remains to manage the sector's correction while preventing wider economic spillovers.
• Although the current measures are larger in scale than those implemented earlier in the year, further actions are likely necessary. The PBOC has indicated that additional RRR cuts may be considered later this year, while further fiscal stimulus could also be introduced to counteract slowing consumer demand. The gradual implementation of increasingly substantial policy interventions is anticipated to help in achieving the growth target. Although measures to address unemployment have also been introduced, urban youth unemployment remains a significant structural challenge.
• After the People’s Bank of China and the Politburo announced a broad stimulus package with the promise of fiscal stimulus to come, China’s equity markets rose sharply. The MSCI China Index gained 24% in September alone, bringing its year-to-date return to nearly 30%, ahead of the MSCI United States, World, and Emerging Markets Indices and on par with MSCI Taiwan and Malaysia returns.

China Rallies 24% in September Following Stimulus Measures

• Looking ahead, if the stimulus seems likely to fend off deflation, many foreign investors may retreat, according to our emerging markets team. Already, foreign inflows to China’s bond market have slipped, by the team’s estimates, while inflows to China equity funds soared to almost $40 billion in the first week of October—double the previous record, according to EPFR

India

• India's robust economic growth is expected to continue in 2H24, as government spending resumes following the slowdown in 2Q24 due to the election season. However, a slight deceleration is anticipated in the growth rates for 3Q24 and 4Q24, owing to the high baseline of growth in 2H23. On a quarterly basis, the Indian economy is projected to decelerate to 6.5%, y-o-y, in 3Q24 and 6.3%, y-o-y, in 4Q24.

• The coalition government formed in June 2024 has maintained policy continuity, with additional emphasis on addressing unemployment. Production-Linked Incentive (PLI) schemes remain in place, supporting industrial output in key sectors, including pharmaceuticals, telecommunications, and automobile manufacturing and components. Employment-Linked Incentives, announced in the 2024 Union Budget released in July, primarily provide financial incentives for first-time employees, benefiting both employers and workers, along with technical training and development initiatives. Additionally, youth internship opportunities are included to enhance job creation.

Russia

• The Russian economy continues to experience growth despite external challenges. Two key factors, namely persistent inflation and a tight labour market, are significantly impacting the economy. Supply-side constraints and elevated government spending are expected to sustain inflationary pressures. Wages are likely to rise further due to tight labour market conditions, although high interest rates may begin to dampen consumption and investment.
• Quarterly, the economy is projected to decelerate from 4.0%, y-o-y, in 2Q24 to 2.3%, y-o-y, in 3Q24 and 1.8%, y-o-y, in 4Q24. Monetary policy is expected to remain tight, and the cancellation of subsidized mortgages provides greater policy leverage for effective monetary transmission. Early signs of disinflation suggest that further interest rate hikes may not be necessary. With inflation around 9%, the primary focus, before reaching the 4% inflation target, is to avoid double-digit inflation, which becomes increasingly difficult to control. Additionally, increased imports, bolstered by a high trade surplus with China, may help alleviate supply constraints in the economy.
• The recent BRICS summit in Kazan, held from October 22-24, 2024, focused on several significant geopolitical and economic issues, resulting in the Kazan Declaration. Here are the key takeaways:

1. Geopolitical Issues: The declaration emphasized BRICS's commitment to the UN Charter, particularly in resolving conflicts through diplomacy, referencing crises in Ukraine, the Middle East, and Southern Lebanon. The bloc expressed concern over the humanitarian impact and called for peaceful solutions to these conflicts
2. Financial and Economic Reforms: BRICS members agreed on moving towards trade in local currencies and enhancing financial integration to reduce dependence on the U.S. dollar. They discussed BRICS Clear, a proposed independent cross-border settlement infrastructure, and considered establishing a BRICS (Re)Insurance Company to provide additional financial autonomy for member nations
3. Sanctions and Economic Autonomy: The bloc voiced opposition to unilateral sanctions, highlighting their disruptive effect on the global economy and international trade. BRICS leaders stressed the need for a fairer financial system, which includes reforming the current international financial architecture to support equitable global economic governance
4. Agricultural and Food Security Initiatives: Russia proposed the creation of a BRICS Grain Exchange, which aims to establish a commodities trading platform initially focused on grain but potentially expanding to other agricultural sectors to boost food security within member countries
5. Innovation in Payments and AI: The summit supported the use of innovative financial practices through the BRICS Interbank Cooperation Mechanism (ICM) and explored artificial intelligence applications within member states, focusing on technological cooperation to strengthen economic resilience

These discussions reflect BRICS’s continued push for a multipolar world order and economic independence from Western financial systems, emphasizing multilateralism and regional collaboration across economic and geopolitical dimensions

Rest of the World?

• Brazil's economy continues to exhibit positive signals in consumer demand; however, the industrial sector remains characterized by volatility. Declining unemployment rates and rising wages are anticipated to bolster robust domestic demand and sustain momentum in the services sector. The improvements in business and consumer confidence observed in September suggest further upside potential for the domestic economy. Nonetheless, the industrial sector is expected to experience ongoing volatility, particularly within the mining and quarrying sectors, as well as to durable and semi-durable goods.
• President Milei’s austerity weighed on the Argentine economy during his first year in office, but the outlook for 2025 is improving, with GDP growth expected to sharply accelerate while inflation will likely continue to rapidly slow. Milei’s RIGI framework, an incentive program for large investments, is a strong first step for attracting foreign direct investment, but a clear continuation of policy and the removal of capital controls will likely be key for unlocking this potential growth driver. The 2025 midterm elections present a risk to the Argentine investment thesis, but improving economic fundamentals could increase the probability that Milei’s coalition gains a majority in the Senate, which would almost certainly accelerate the pace of reforms.
• In South Africa slight acceleration in growth observed in 2Q24 is expected to be sustained into 2H24 and continue into 2025. This growth is being driven by ongoing improvements in the power generation sector, as a more stable electricity grid is anticipated to positively impact the economy, particularly the industrial sector. These developments are also expected to benefit the labor market, with high unemployment rates projected to soften. The power sector will also benefit from market reforms that have increased competition, leading to more reliable output in the medium term. Additionally, monetary easing is expected to continue following the 25-basis point rate cut in September, marking the beginning of the easing cycle. With inflation within the target range and below the midpoint, another rate cut is anticipated at the next meeting in November. According to MPC statements, interest rates could stabilize slightly above 7% in 2025, down from the current rate of 8%. These trends suggest that economic growth will accelerate in 2025.
• Bank Indonesia surprised markets with a rate hike in April 2024, raising its benchmark rate to 6% from 5.75%. The unexpected tightening was driven by concerns over currency stability and global financial conditions. However, with inflation below the central bank’s target and global headwinds dampening growth, pressure to cut is building. We believe gradual easing could begin as early as the fourth quarter and continue through 2025.
• Indonesia has officially banned the sale of Pixel smartphones made by Alphabet due to new rules that require certain devices sold domestically to contain at least 40% of locally manufactured parts. The world's fourth most populous country also blocked Apple's iPhone 16 for the same reason, with the tech giant failing to meet a $95M investment commitment. Local content rules and protectionist measures have seen an uptick across the globe
• Banco de México (Banxico) cut its policy rate in March 2024 from the peak of 11.25% and cut again in August, prompted by a drop in inflation and weakening growth. With the policy rate now at 10.75%, Banxico is expected to ease further, either in the fourth quarter of this year or early 2025, likely moving at a gradual pace to avoid reigniting inflation, which has moderated but remains above target. President Claudia Sheinbaum underscored her respect for Banxico’s independence during her inauguration speech on 1 October, which should allow the central bank to continue focusing on its single mandate of controlling inflation with limited political influence.
• Benefiting from its attractiveness as a supply chain center, Vietnam achieved GDP?growth of 7.4% in the third quarter of 2024. Leaving aside the sharp rebound after real GDP collapsed during the pandemic, this was the strongest economic growth since 2017. ?Vietnam’s growth was led by exports, up 15.8% in the third quarter versus a year earlier. Exports to the United States were strong. Vietnam is home to the assembly of many consumer products headed to the United States. These products utilize inputs imported from China. As the US economy slows in the coming year, it could have a weakening effect on Vietnamese exports.?The biggest contributor to Vietnam’s export growth is electronics. In fact, electronics exports were up 20.6% in the third quarter. This included products such as smartphones, computers, and other consumer electronics. Meanwhile, global companies are investing in Vietnam to producer higher-valued added electronic products, helping Vietnam to move up the value chain.
• Saudi Arabia’s nearly $1 trillion Public Investment Fund wants to focus more on the domestic economy. It aims to lower the share of global investments in its portfolio from 30% to 18%. In 2016, the aspiration was to eventually invest half of the holdings abroad. The PIF — like other regional sovereign investors — is increasingly flexing its financial muscle and wants foreign firms to do business on its terms. In previous years, the titans of finance would flock to the FII to raise money and invest it around the world. Now, they’re faced with a kingdom that’s more domestically-focused than ever.
• Fitch upgraded Egypt credit rating for the first time since 2019. Reasons: $57 bn global bailout, hot money inflows, a more flexible exchange rate. At the same time, pound steadiness has made investors question the IMF if the currency is truly flexible.
• The Mideast war has cost Lebanon $20 bn, and the figure is rising. That’s higher than the country’s annual income of $18 bn in 2023. A banking crisis had already more than halved annual income from over $50 bn in 2018.
• The US expanded sanctions on Iran oil sector, allowing for sanctions on anyone linked to it. It has been pressing Israel not to target Iran’s energy or nuclear sites.
• Iraq said it pumped below OPEC+ quota in September. OPEC+ had pressed Iraq, Kazakhstan & Russia to fully implement output cuts. It also asked them to make additional reductions in compensation for past over-production.
• Kais Saied won presidential re-election in Tunisia. Received 91% of the votes, with 29% turnout. Tunisia continues its shift towards authoritarianism.

Commodities

• Commodity prices benefited from higher-than-expected US Federal Reserve (Fed) interest rate cuts in September, though global macroeconomic uncertainties remained a drag on prices. China announced a series of monetary and fiscal stimulus packages to support the property and construction sectors, as well as the overall economy. Yet, as these announcements were made late in the month, support to prices was limited.
• The energy price index was down by 19.0%, y-o-y, pressured by lower average crude oil, coal and US natural gas prices, but partially offset by higher EU natural gas prices over the same period.
• The global oil demand growth forecast for 2024 is revised down by 106 tb/d to 1.9 mb/d, y-o-y, still well above the historical average of 1.4 mb/d seen before the COVID-19 pandemic. The adjustment reflects actual data received, combined with slightly lower expectations for some regions. The forecast for world oil demand growth in 2025 is also revised down by 102 tb/d to 1.6 mb/d, y-o-y. Non-OECD oil demand is set to drive next year’s growth, increasing by about 1.5 mb/d, y-o-y, led by contributions from China, Other Asia, the Middle East, and India. The OECD demand is forecast to expand by about 0.1 mb/d, y-o-y, with OECD Americas providing most of the contribution.
• Copper prices rose in September, increasing by 3.2%, m-o-m, and were up by 11.9%, y-o-y
• Aluminium prices advanced in September, rising by 4.9%, m-o-m. Prices were up by 12.5%, y-o-y
• Nickel prices continued to trend downwards in September, falling by 1.0%, m-o-m, and 17.8%, y-o-y
• Lead prices rose in September by 0.5%, m-o-m, and were down by 10.5%, y-o-y.
• Zinc prices increased by 4.9%, m-o-m, in September, and were up by 14.2%, y-o-y.
• Iron ore prices declined in September, falling by 7.3%, m-o-m, and were down by 23.0%, y-o-y.

• Gold prices reached a new high in September on the back of higher-than-expected US interest rate cuts. Gold has been one of the best performers among major commodities this year. It has surged more than 28% year-to-date, hitting a series of records on the way, supported by rate-cut optimism, strong central bank buying and robust Asian purchases. They were further supported by higher safe-haven appeal and geopolitical risk premiums.
• Silver and platinum prices benefited from higher demand on the industrial side amid a lower US dollar. The precious metals index was up by 33.2%, y-o-y. Gold, silver and platinum prices were also up by 34.2%, 30.4% and 5.0%, y-o-y, respectively.
• Lithium, graphite and cobalt prices fell by 5.8%, 4.9% and 4.3%, m-o-m, respectively. The index was down by 37.6%, y-o-y; lithium, graphite and cobalt prices were down by 60.0%, 20.3% and 26.9%, y-o-y, respectively.?
• The October 2024 USDA corn production and WASDE data were largely neutral and rather uneventful by USDA standards. U.S. production rose 17 mil. bu. to 15.203 bil., which is ?roughly 50 mil. above expectations. The record yield was extended to 183.8 bpa, which is up from 183.6 bpa in September.
• U.S. soybean production slipped 4 mil. bu. to 4.582 bil., which is still a record large crop. However, it was in line with expectations. The average yield was cut .1 bpa, yet remains a record high at 53.1 bpa. Harvested acres were left unchanged at 86.271 mil.
• U.S. wheat ending stocks dropped 16 mil. bu. to 812 mil., which is a touch below expectations as feed and residual use rose 10 mil. bu. The USDA left its export forecast unchanged for now at 825 mil. bu
• By September 30, 2024 the U.S daily cattle slaughter year-to-date was 23,301,230 head, which was down 938,422 head year-to-date or 3.9% lower year-to-date compared to 2023. The national average steer price was $185.18.
• While cattle inventories are down in 2024, hog inventories are up in 2024. U.S hog slaughter was up 1,102,832 head by the end of September 2024. Year-to-date in 2023 hog slaughter was up 1,274,000 head, for two years of increasing supplies??
• Uranium spot prices are at $80 per ounce. Russia has around 5% of the world’s mine supply of uranium and 45% of the world’s ability to enrich uranium. The uranium market has been underpinned by fresh supply-side concerns, with Russian President Vladimir Putin expressing the possibility of limiting uranium exports to the West

?Currencies

• The US dollar looks attractive against developed FX in weaker economies, such as CAD and AUD.?The level of US conditions remains stronger than across the rest of the developed world and is likely to keep that momentum as stimulus proceeds, while conditions point to the possibility of a slightly slower pace of normalization.
• Other currencies’ moves over the last two months have created more tension with policy limits.?CHF, SEK, and several EM Asia?currencies appreciated as carry trades unwound, despite weak domestic conditions that are likely to necessitate continued easy policy (and a backdrop that allows this, as global inflation has receded). The opposite is true for certain higher-yielding EMs with strong external balances, like Mexico. Despite rising fiscal spending, Mexico has avoided liabilities that could create a durable need to purchase dollars, though its currency is priced to depreciate sharply.
• The Euro weakened in September due to ECB rate cuts and strong US economic data but is expected to remain stable in October with cautious ECB policies supporting key strength levels. The euro had a volatile September as the European Central Bank’s (ECB) cut interest rates by 25bps.?
• In September, the Pound strengthened against the USD and EUR, boosted by US rate cuts and UK economic stability. GBP is expected to remain strong, with a potential Bank of England rate cut in November. This performance was primarily driven by external factors, especially the Federal Reserve’s decision to cut interest rates in response to weaker U.S. economic indicators.?
• The Australian dollar rose in September, supported by steady interest rates, strong retail sales, and optimism over China’s economic stimulus measures, boosting confidence in commodities and risk assets.
• The Bank of Japan kept interest rates unchanged in September, with no urgency for hikes. Political uncertainty and US labour data are pressuring the yen, leading to gains in USDJPY.
• The Canadian dollar struggled in early October despite strong retail sales and manufacturing activity, with further rate cuts expected from the Bank of Canada due to slowing economic growth.
• Bitcoin has actually fallen by 8% since the end of September. There are positive signs emerging - Global liquidity growth and HODLer balance trends hint at a potential price surge, though retail FOMO is currently lacking
• Emerging-market currencies are mostly down against the dollar in the first 10 months of 2024. Worst performers: Nigeria, Egypt, Argentina. Best performers: Sri Lanka, Malaysia, South Africa.

Container Shipping

• Ship supply is expected to grow on average 10.3% in 2024 and 6.3% in 2025. After increasing in 2024, sailing speeds are expected to reduce in 2025. Rerouting via the Cape of Good Hope is expected to impact all of 2024. On average, the supply/demand balance will be stronger in 2024 than in 2023. Weakening during 2nd half of 2024 has begun and will gather speed if ships return to the Suez Canal. Significant uncertainty remains as it is unknown when ships can return to the Red Sea. If they cannot return during 2025, supply/demand will be stronger than in our base scenario.?

• Attacks on ships in the Red Sea have forced 90-90% of container ships to sail around the Cape of Good Hope, adding 10% to average sailing distances and ship demand. Ship deliveries will hit a new record high in 2024, beating the record set in 2023. The fleet is expected to grow 14.5% between end 2023 and end 2025. Recycling is expected to remain low in 2024 as the Red Sea situation increases demand for ships. Recycling could increase in 2025. Congestion remains low in most ports. Failure to renew longshoremen contract for US East and Gulf Coast could cause disruptions. The long sailing distances around the Cape of Good Hope have led to a slight increase in sailing speeds.

• Cargo volumes will grow 4-5% in 2024 and 3-4% in 2025. Volumes in headhaul trades are expected to grow slightly faster than the average.

• Average monthly fleet will grow 10.1% in 2024 and another 6.7% in 2025. Due to the longer sailing distances around the Cape of Good Hope, average sailing speeds have increased during 2024, and ship supply is therefore growing faster than the fleet.

Risks

• We began the year with a subdued outlook for equities but stock markets have maintained their incredible momentum. Record highs were reached in the US, Europe, and, most notably, Japan amid resilient economic data and robust corporate earnings. An ongoing decline in the equity risk premium, lofty valuations (especially in the US), and shifting expectations around interest rates could eventually temper enthusiasm. Against this backdrop, one might imagine this current acute phase of elevated risk to be reflected in global risk premia. Instead, standard gauges of risk such as the CBOE Volatility Index (VIX) remain below historical averages, and the cost of hedging against equity drawdowns, currency depreciation, or credit deterioration remains well below post-pandemic averages and close to the multi-cycle lows seen in 2023. The exception of late has been higher volatility in bonds and currencies and a sharp rise in demand for gold, the latter of which is also seeing a surge in demand from both Chinese state-backed bodies and retail buyers. In sum, as a growing trend of global fragmentation further reinforces the uncertain landscape, investors should prepare for volatility until such time as calmer times prevail
• The U.S. and China are seeking stability. The two sides are maintaining open lines of communication across many dimensions, including in the military area. Yet a new normal of intense competition churns beneath the surface. Persistent and large-scale exporting of excess industrial capacity by China has become the next driver of friction with the U.S. and others. Technology competition remains front and center. In the military space, the U.S. is particularly focused on tensions in the South China Sea. Increased frictions between China and the Philippines over the Sabina Shoal and Second Thomas Shoal pose a meaningful risk of miscalculation or accident, and risk bringing in the U.S. as a treaty ally of the Philippines. Conflict over Taiwan remains a risk over the medium- and long-term and would have a significant global economic impact. The U.S. and its allies are focused on China’s support for the Russian war effort, which could lead to additional U.S. sanctions, as well as the increased frequency of joint exercises between China and Russia.
• The U.S. and China are engaged in a long-term, zero-sum technological competition that is at the center of the U.S.-China relationship. They are pursuing targeted decoupling, focused especially on advanced technologies like AI, semiconductors, and quantum computing, as well as technologies with military applications. China has responded to date by investing in its own capabilities and building out self-reliance. It has tightened export controls on critical minerals and is considering retaliatory economic actions, particularly against Europe.
• Russia’s invasion of Ukraine is the largest, most dangerous military conflict in Europe since World War Two. Ukraine went on the offensive in August when it launched a surprise ground assault into Russia’s Kursk region and seized 500 square miles of territory. However, Russia continues its push in the Donbas and Ukraine remains in a vulnerable position. Russia is receiving significant military support from Iran, including drones and ballistic missiles, as well as major financial backing and dual-use items from China. Ongoing policy debates concern whether Western countries will permit and support long-range arms to be used to strike within Russia, and whether this can bring about some effort to resolve the conflict. We see a ceasefire or diplomatic solution as unlikely this year. For now, the war is likely to remain a continued war of attrition and battle between the two sides’ industrial bases – while the risk of escalation and direct conflict between Russia and NATO remains.
• Tensions between Israel and Iran’s Resistance Front allies continue to rise, with Israel’s northern border with Lebanon the current flashpoint. Israel and Hezbollah’s near-daily rocket exchanges have displaced people on both sides of the border, and a series of actions in September have significantly escalated the situation. These include an Israeli attack on Hezbollah communications systems, heavy Israeli airstrikes in Lebanon that caused the deadliest day there since the end of the country’s civil war in 1990, and, most recently, the assassination of Hezbollah leader Hassan Nasrallah. Both sides have talked of a “new phase” in the fighting, and the risk of full-blown conflict is significant. Other potential sources of escalation are Iran’s recent steps to accelerate its nuclear capacity and to deepen its collaboration with Russia. In Gaza, a ceasefire agreement for an exchange of hostages continues to be out of reach as the war between Israel and Hamas hits its one-year anniversary – and there is still no agreed plan for post-war governance and security in Gaza. Israeli operations in Gaza are likely to persist into next year.
• The threat of terrorism against U.S. interests is at an extraordinarily high level. U.S. law enforcement and intelligence agencies have cited violent extremists, lone actors, and the emergence of new terrorist hotspots as major areas to watch. The FBI has warned of terrorists drawing inspiration from events abroad to attack the U.S., and recent reports have flagged increased vulnerability in the West stemming from decreased investment in counterterrorism efforts. Al-Qaida and the Islamic State keep rebuilding their global reach, showing increased motivation and capability to conduct attacks abroad. The Sahel region is of particular concern as military takeovers have threatened the West’s efforts to fight against terrorism.
• Market attention to cyber attacks has reached all-time highs this year. Mounting geopolitical competition will likely cause cyber attacks to increase in scope, scale, and sophistication, we think. Intelligence officials continue to uncover state-backed hackers who have been infiltrating and pre-positioning malware in critical national infrastructure – with the intent to cause disruption and destruction in the outbreak of future conflict. A June hack against a cloud storage company could be one of the biggest-ever data breaches and underscores the threat to cloud infrastructure. Iran has become more aggressive in its foreign influence efforts, and in August U.S. intelligence announced that Iran-based hackers targeted the Trump, Biden and Harris campaigns.
• Emerging market (EM) economies have been boosted by central bank rate cuts and resilient developed market (DM) growth. Yet China’s challenged economic activity and the long-term costs of fragmentation present risks to EM. While countries like India, Mexico, and Vietnam are likely to benefit from supply chain diversification, others with substantial short-term debt obligations like Argentina remain vulnerable despite domestic policy adjustment.
• North Korea has launched thousands of trash-filled balloons into South Korea. These ballons have disrupted flights and become a new source of tension. In the meantime, North Korea’s nuclear program continues unabated. North Korea is growing notably closer to Russia, to which it has become a top arms supplier. This was underscored by President Vladimir Putin’s June visit to Pyongyang for the first time in two decades. Russia and North Korea signed a strategic partnership agreement and signaled a deeper, more extensive defense relationship. In response, South Korea and Japan are bolstering their defenses and strengthening ties with each other and the U.S.
• The world is seeking to deliver on decarbonization commitments and energy security goals as damaging weather and heat-related incidents increase in frequency and magnitude. Clean energy will increasingly become a source of geopolitical competition, we think, benefiting those who can control and access it. In the U.S., the Inflation Reduction Act will help accelerate the development and deployment of low-carbon technologies. Countries may have to choose between cheap clean tech and more protectionist, security-oriented industrial policy.
• Market attention to European fragmentation is up sharply since last year. Europe remains largely united on key issues: increasing European Union (EU) competitiveness, building up its strategic autonomy, and supporting Ukraine. These themes are evident in Mario Draghi’s recent competitiveness report. Disagreements are largely centered on execution and financing. Several issues could strain European cohesion going forward. These include migration, which last year reached the highest levels since 2016, and Europe’s approach to China. Revision of the EU Stability and Growth Pact fiscal rules following their suspension during COVID could also put some individual national governments into conflict with Brussels. The latest EU parliamentary elections in June saw centrists retain power, with right-wing and anti-establishment parties gaining ground. In Germany, voters in two eastern states delivered a far-right party its best result since WWII. In July, the Labour Party won the UK election in a landslide. Following snap elections in late June, France’s recently appointed minority government will face difficult 2025 budget negotiations this fall – with lingering question marks around government stability and EU budget clashes
• Monetary policy tightening bites more than intended. Although policy rates are projected to normalize, an unanticipated back-loaded strengthening of the transmission of earlier rate increases could lead to a faster-than-anticipated deceleration in near-term growth and rising unemployment. Though the impact on growth is unlikely to be persistent given concurrent policy easing, a rapid weakening of activity could also work its way adversely through consumer and business sentiment. This would place a stronger drag on household spending and prompt businesses to dial back their investment plans, either (or both) of which could create a negative feedback loop to growth. In such circumstances, however, lower energy prices would cushion some of the negative effects on growth as lower demand would push oil prices down.
• Financial markets reprice as a result of monetary policy reassessments. The global economy is at the last mile of disinflation, which may present greater challenges to monetary policy than expected if the cost of reducing inflation in terms of unemployment (the sacrifice ratio) is closer to prepandemic estimates than suggested by recent evidence. If underlying inflation proves more persistent than expected, consumers may adjust their near-term inflation expectations, forcing central banks to adjust the path of monetary policy normalization. This would weaken consumer and business confidence, lead to market repricing and tighter financial conditions, and slow economic recovery. Given existing vulnerabilities, financial market turbulence could resurge, prompting sizable price corrections. Contagion effects are possible and could increase risks to financial stability by, among other things, triggering sovereign debt stress in emerging markets.
• Sovereign debt stress intensifies in emerging market and developing economies. Although spreads have eased since peaking in July 2022, some emerging market and developing economies are still vulnerable to a repricing of risk. This could further increase their sovereign spreads and push them into debt distress. Countries with large external financing needs and a low buffer of international reserves will be most affected, as many are already subject to large sovereign borrowing spreads. With little room to maneuver on fiscal policy, forcing a front-loaded fiscal consolidation could precipitate an economic downturn amid a fragile recovery. Low-income countries will be particularly at risk given their limited fiscal space and the need to maintain expenditure on programs supporting the most vulnerable.
• China’s property sector contracts more deeply than expected. Conditions for the real estate market could worsen, with further price corrections taking place amid a contraction in sales and investment. The experiences of Japan in the 1990s and the United States in 2008 suggest that a further price correction is a plausible downside risk if the crisis is not adequately addressed. Further price drops could dent consumer confidence (which is already at historic lows) even more, further weakening household consumption. This could cause domestic demand to falter, with negative spillovers to both advanced and emerging market economies given China’s rising footprint in global trade. Government stimulus to counter weakness in domestic demand would place further strain on public finances. Subsidies in certain sectors, if targeted to boost exports, could exacerbate trade tensions with China’s trading partners.
• Renewed spikes in commodity prices arise as a result of climate shocks, regional conflicts, or broader geopolitical tensions. Intensification of regional conflicts, especially given the wider span of conflict in the Middle East, or the war in Ukraine, could further disrupt trade, leading to sustained increases in food, energy, and other commodity prices. Commodity price volatility may result in higher inflation, especially for commodity-importing countries, and restrict central banks’ room to maneuver. Extreme heat and prolonged droughts amid record high temperatures worldwide could also have an impact on harvests, adding to pressures on food prices and food security. Low-income countries are likely to be disproportionately affected, since food and energy costs take up a large part of household expenditures there.
• Countries ratchet up protectionist policies. A broadbased retreat from a rules-based global trading system is prompting many countries to take unilateral actions. Not only would an intensification of protectionist policies exacerbate global trade tensions and disrupt global supply chains, but it could also weigh down medium-term growth prospects by limiting positive spillovers from innovation and technology transfer, which fueled growth in emerging market and developing economies as globalization took off.
• Reports of social unrest— including protests, riots, and major demonstrations—have picked up in some regions, although globally they remain fewer in number than the recent peak in late 2019 to early 2020. However, a resurgence of social turmoil, potentially driven by higher inflation, higher taxes, and associated loss of purchasing power; spillovers from conflicts; and rising inequality, could slow economic growth, particularly in countries with more limited scope to cushion the impact through policies. Social unrest could also complicate the passage and implementation of necessary reforms.
• The global economy has been enduring a prolonged period of structural weakness, and medium-term prospects under current policies remain bleak. The slowdown in global growth is attributed largely to aging populations, weak investment, and structural frictions that hinder the reallocation of capital and labor toward productive firms. This is especially concerning because demographic pressures are expected to continue, and structural transformations related to the green transition and technological changes will require significant investment and resource reallocation. In this context, policymakers are urged to advance structural reforms—that is, to update the rules and policies that shape how an economy operates—to boost productivity, employment, and growth. Key priorities include easing entry barriers and fostering competition in product markets to facilitate the reallocation of resources across sectors, thus helping countries harness the potential benefits of new technologies. Similarly, reforms to encourage workers to work longer and to facilitate the integration and improve the skill matching of foreign-born workers can help counterbalance the labor supply challenges posed by aging populations
• In essence, structural reforms are policy changes that modify acquired rights and economic rents with the aim of improving the allocation of resources in the economy. As such, they inevitably create winners (the beneficiaries from efficiency gains) and losers (those whose rents or acquired rights the reforms affect negatively). For instance, reforms to foster competition can boost output and reduce prices, benefiting workers and consumers throughout the economy, but the immediate targets are the rents of the few firms with market power under existing rules and the workers in those firms.
• Incremental rollout of reform measures, starting with focused areas that do not immediately threaten core benefits of several social groups, is often associated with stronger sustainability of reforms. For instance, an important focus of Brazil’s reform was on reducing excessive labor litigation costs, India’s labor reform efforts began with consolidating and standardizing minimum wage regulations across all sectors, and France started with simplifying collective bargaining. In Denmark, although the first wave of labor reforms occurred in the early to mid-1990s, subsequent reforms, including measures targeting youth and long-term unemployment, extended into the 2010s. Conversely, when governments have pursued multiple substantial market-oriented reforms simultaneously, reform implementation has usually been less successful: in Bolivia and Georgia, for instance, some of the reforms that were enacted were eventually reversed. This could reflect the fact that negotiating extensively in several reform areas at the same time eventually exhausts governments’ political capital or that fast-track implementation of multiple substantial reforms does not allow governments to adequately balance social interests.
• The International Monetary Fund (IMF) has outlined several essential structural reforms to support sustainable global growth, manage high debt levels, and mitigate social and economic risks. Key areas emphasized in 2024 include:
• Productivity Reforms: Enhancing productivity is critical, particularly in advanced economies facing stagnation. The IMF recommends reforms that promote market competition, improve capital and labor allocation, and increase openness in trade. These measures can help reverse the trend of declining productivity, which has been a significant drag on economic growth, especially in regions with aging populations and labor shortages.
• Labor Market Flexibility and Workforce Integration: With demographic challenges such as aging populations in advanced economies, increasing labor force participation is vital. The IMF suggests policies to integrate migrant workers, improve gender equality in the workforce, and support re-skilling programs, which can boost productivity and economic stability by tapping into underutilized labor pools.
• Green Transition and Climate Policy: The IMF stresses the importance of aligning economic reforms with climate goals. Structural changes to support the green transition, such as fostering clean energy, enhancing regulatory frameworks, and mitigating environmental risks, are seen as essential for long-term sustainability, especially in emerging markets where environmental challenges can have direct economic impacts.
• Financial Sector Development: Financial access reforms that enhance credit availability and digital finance adoption are essential for economic resilience. The IMF suggests these reforms can help reduce disparities in emerging markets and boost growth by supporting small- and medium-sized enterprises (SMEs) and fostering inclusive economic participation.
• Public Debt and Fiscal Management: High public debt remains a critical concern, particularly as interest rates remain elevated. The IMF advocates for fiscal reforms that balance debt reduction with growth needs, suggesting that revenue-boosting policies and efficiency improvements in public spending can free up resources for investments in health, education, and infrastructure.
• These recommendations target the specific challenges of today’s global economy, where slowing growth, high debt, and climate concerns intersect. By implementing these structural reforms, countries can potentially increase global growth by over 1 percentage point by 2030, helping stabilize the global economy amid ongoing uncertainties.
• While Beijing’s recent efforts are a step in the right direction and could help boost China’s GDP growth for the next year, they may not be enough to address at least two key structural problems facing the economy:
• A beleaguered residential real estate market:?Excess supply and collapsing confidence have led to declining home prices. This, in turn, has contributed to a deflationary spiral—in which prices fall and the burden of mortgage debt rises. (Generally, deflation makes debt harder to repay, because even though prices are falling, so is the value of assets, while the amount owed remains the same.) China’s challenge is so severe that some experts believe nothing short of a massive rescue program—akin to?measures taken during the 2007-2009 financial crisis—will cure it. Morgan Stanley analysts estimate the cost of such a program might be as much as five times the current announced and speculated stimulus programs.
• A high cost of capital:?Equally constraining has been the central bank’s reticence to get aggressive about the “real” cost of capital. While nominal rates have fallen and now are around 3.6%, they are closer to 5% when adjusted for deflation. For perspective, U.S. real rates have stabilized around 1.5% to 1.75% in the last year. This dynamic has kept the renminbi’s value relatively high versus the U.S. dollar, yet a?weaker?domestic currency would likely be more beneficial by making China’s exports cheaper to foreign buyers. This could help domestic manufacturers, many of them suffering from spare capacity.
• Beyond these challenges, China also struggles with poor consumer sentiment, disappointing youth employment prospects and confusing messaging around the government’s support of equity markets, not to mention more immediate threats from geopolitical rifts with the U.S. For now, Beijing’s efforts are more likely to support a tactical bounce in equity markets, but fall short of the catalysts for a new bull market. Investors should watch the renminbi for signs of strength, as that will be an indicator that stimulus efforts are actually working on the real economy.?

Elections

• Presidential and congressional elections are under way across America, with citizens in more than half of the states now voting either by mail or casting their ballots in person before Election Day. The race for the White House remains exceptionally close, with candidate preference polls giving Vice President Harris a slight edge in some battleground states and former President Trump narrowly leading in others. While it may be tempting to attribute the tightness of this year’s contest to the polarized political climate, it is worth remembering that presidential races are often decided at the margin
• Stock market performance has historically been stronger under Democratic Presidents, but this may be due to the state of the business cycle at the time of election rather than the party’s inherent influence.?

• Democrats have been fortunate to be elected during the early stages of the economic cycle much more often than Republicans, contributing to stronger stock market returns during their Presidential terms.?
• The current state of the economic cycle could have a greater impact on market performance than the election outcome. If the Federal Reserve manages a soft landing, the economic cycle would be extended, allowing markets to benefit from mid-cycle momentum, but a hard landing could lead to significant market weakness
• For Election 2024, determining where we are in the economic cycle may matter much more than who is elected. While many would assume that the economy is in the late innings of the business cycle, this will depend on whether the Federal Reserve is successful in achieving a soft landing. If it is, the economic cycle would be extended, similarly to what happened in the mid-1990s. That would mean the current election would be categorized as mid-cycle, potentially resulting in several years of strong equity market returns. But if the Fed is unsuccessful and a hard landing ensues, that would mean the current election would be labeled as late-cycle. This could foretell weak equity market returns for whoever takes over the Oval Office come January.

• The biggest concerns stem largely from the proposals for new import tariffs from Republican candidate and former President Donald Trump. During the 2016–2020 Trump administration, the average tariff on US imports from China rose to 17% from 4%. If the current proposal for a 60% tariff on China were fully implemented, the incremental tariffs on imports from China could represent more than $230 billion annually (1.3% of China’s GDP in 2023). In recent weeks, Trump has also hinted at 100% tariffs on imports from countries moving away from using the US dollar.
• The proposed 10%–20% import tariffs on other countries could also cause disruption, especially among the markets most vulnerable to protectionist trade policies from the United States. These countries generally have high revenue exposure to and a high dependency on the United States as an export market; they are also deeply involved in the US supply chain and contribute a large share to US final demand. By these measures, Canada, Switzerland, and Mexico top the list currently, although it is possible that Mexico would be exempt from new import tariffs due to its inclusion in the US-Mexico-Canada trade agreement.

Countries’ Exposure to US Trade Protectionism

• That said, the implementation of a universal 10% tariff would likely be used more as a negotiation tool with some trading partners to try to avoid Chinese circumvention of tariffs through third countries, reduce trade deficits, and gain leverage in other negotiations, such as immigration with Mexico.
• Among other emerging economies, those with high exposure to the United States and products that can be easily substituted would likely be most negatively affected, including Malaysia, South Korea, and Thailand. Countries with high US exposure but less replaceable products, such as commodities, could be spared, including Chile, South Africa, and Indonesia.
• In terms of sequencing of these tariffs, China would likely be the first target. Trump and his advisors have highlighted that competition with China is an important challenge for the United States, signaling this would be a primary area of focus.

China Effects

• The impact of more US tariffs on China’s economy would depend partly on how much China ends up shouldering the burden. While US consumers and companies would pay the tariffs, many of China’s exporters would potentially lower their prices—and thus their margins—to maintain competitiveness in the United States. Adding to the uncertainty, the Biden administration has recently proposed changes to a de minimis loophole, currently used by companies like Temu, Shein, and AliExpress to ship their low-value Chinese goods to the United States without paying import duties and processing fees. With new tariffs, the overall economic environment could become more uncertain, hindering investment in innovation and further affecting China’s long-term growth.
• The effects of the proposed tariffs on China would also depend on whether trade patterns would shift as a result. Approximately two-thirds of China’s exports to the United States already face additional tariffs, and this appears to have accelerated the diversion of trade to other regions. China’s exports to the United States as a percentage of its total exports fell from 21% in 2018 to 14% in 2023, while its exports to other regions like the Association of Southeast Asian Nations and the European Union have expanded. At the same time, US imports from other economies are increasing at the expense of China’s exporters.
• In the event that China chooses to respond with reciprocal tariffs, it would likely damage its own economy more than that of the United States. If both countries imposed reciprocal 60% tariffs, China would suffer a GDP loss of approximately $770 billion, while the United States would incur a loss of approximately $327 billion over the same period, based on estimates from the Peterson Institute.
• China could also opt to employ nontraditional trade retaliation measures that would disproportionately impact the United States, such as currency depreciation, withholding supplies of critical minerals, reducing imports of politically sensitive US products, selling off US assets, extending tax rebates to local exporters, and cutting interest rates.
• Looking ahead, China could also shift its import strategy away from the United States—last year, its largest US imports were soybeans, integrated circuits, and crude oil. Brazil, various countries in Asia, and Saudi Arabia are significant global suppliers of these commodities and could potentially expand their market share in mainland China.

Potential Beneficiaries if China Diversifies Away from the US