What in the World! September 2024

Global Economy

• Global economic growth in 1H24 proved to be resilient, and this stable growth pattern extended into 3Q24, bolstered by strong consumer spending, particularly in the services sector. This positive trend has persisted despite ongoing uncertainties over interest rates, trade negotiations, and geopolitical developments.

• Global growth is expected to stabilize over the projection period at 3.2% in both 2024 and 2025, in line with the average pace observed through the first half of this year. The lagged impact of monetary policy tightening in advanced economies on growth has begun to moderate, and further monetary policy easing as inflation declines will support interest-rate-sensitive expenditures in 2025. The decline in inflation will also provide a further boost to real income growth and a tailwind to private consumption in many economies.

• In the United States and Canada, economic growth is projected to slow over the coming quarters from the solid pace observed in the first half of 2024. Nonetheless, monetary easing is projected to help underpin stronger growth through the second half of next year. On an annual basis, real GDP growth is projected to be 2.6% in 2024 and 1.6% in 2025 in the United States and 1.1% and 1.8% in Canada.
• Europe will also benefit from policy rate reductions and the further recovery in real incomes, with euro area growth projected to be 0.7% in 2024 and 1.3% in 2025, and the UK economy expanding by 1.1% in 2024 and 1.2% in 2025. The European Central Bank (ECB) cut its benchmark interest rate by 25 basis points recently. This was the second rate cut this year. Investors expect further rate cuts in the months ahead, with one cut expected this year. This action was based on ECB expectations that inflation will continue to decelerate. The ECB said that it expects inflation in 2024 to be 2.5% while inflation in 2025 is expected to be 2.2%. This is within the range of the ECB target of 2% inflation. Also, given that service inflation has been more persistent than previously expected, the ECB expects core inflation (which excludes the impact of energy and food prices) to be 2.9% this year and 2.3% in 2025
• In Japan, while the weak first quarter outturn reduces projected annual growth in 2024 to -0.1%, strong real wage gains are expected to offset the impact of tighter macroeconomic policies, with output expanding by 1.4% in 2025. Growth is projected to be stable in Korea, at 2.5% this year and 2.2% in 2025, with exports aided by ongoing strength in global semiconductor demand.
• In Australia, growth is projected to pick up from 1.1% this year to 1.8% in 2025, with household consumption supported by a recovery in real disposable incomes. 13. Economic growth in the emerging market G20 economies is expected to remain broadly stable, despite diverse projected outcomes within the group.
• In China, growth is expected to be supported through the second half of 2024 by an increase in government spending following a recent rise in local government bond issuance. Even so, the protracted correction in the real estate sector is anticipated to continue and inadequate social safety nets and soft consumer confidence will remain a drag on private consumption growth, with GDP growth projected to be 4.9% in 2024 and 4.5% in 2025.

• Solid domestic demand growth is projected to continue in India and Indonesia over the next two years. In India, GDP growth is projected to be 6.7% in FY 2024-25 and 6.8% in FY 2025-26, while Indonesia is projected to grow by 5.1% in 2024 and 5.2% in 2025.
• Brazil is anticipated to maintain some of the solid economic momentum observed through the first half of 2024, helped by higher fiscal spending. Despite a slower pace of monetary policy easing, annual growth is projected to be 2.9% in 2024 and 2.6% in 2025.
• Growth in Mexico is projected to moderate to 1.4% in 2024 and 1.2% in 2025, with the current slowdown in domestic demand growth persisting into next year. 14. Aggregate consumer price inflation for the G20 is projected to decline markedly, helped by lower commodity prices and easing service price inflation as labor cost pressures moderate.

• Global trade is recovering faster than expected, but shipping costs remain elevated and export orders have recently moderated. ?

• Headline inflation in the G20 is projected to fall from 6.1% in 2023, to 5.4% in 2024 and 3.3% in 2025. Core inflation in the G20 advanced economies is anticipated to ease and be in line with central bank objectives in most G20 countries by the end of next year, declining from 4.2% in 2023 to 2.7% in 2024 and 2.1% in 2025. 15. Inflation in the emerging-market economies is projected to remain generally higher than in the advanced economies, while also easing gradually. Even so, there are disparate patterns across countries. Inflation in Argentina and Türkiye is expected to ease through 2024 and 2025, but to remain at double digit rates. In China, inflation is expected to gradually increase but to stay at very low levels. The recent resurgence in price pressures in Brazil means inflation is now expected to be slightly higher at the end of 2025 than previously anticipated, although still in accordance with the central bank inflation target range.
• Recent activity indicators suggest ongoing momentum, especially in services sectors. Real wage growth is now supporting household incomes and spending, though purchasing power has yet to fully return to pre-pandemic levels in many countries.

United States

• Inflation in the United States continued to decelerate in August. Consumer prices were up 2.5% from a year earlier, the lowest rate of inflation since February 2021. It was the fifth consecutive month in which annual inflation receded from the previous month. Prices were up 0.2% from the previous month. Also, the annualized three-month increase in the consumer price index (CPI) was 1.1%, indicating that inflation has decelerated significantly.
• When volatile food and energy prices are excluded, core prices were up 3.2% in August versus a year earlier, the same as in July and the lowest rate since April 2021. Core prices were up 0.3% from the previous month, the biggest monthly increase since April. The annualized three-month increase in the core CPI was 2.1%, indicating that, in recent months, underlying inflation has reached the Fed’s target.
• First, there was a sharp drop in energy prices in August, which explains the gap between headline and core inflation. Gasoline prices were down 10.3% from a year earlier and down 0.6% from the previous month. Meanwhile, the price of food eaten at home was up only 0.9% from a year earlier. Food eaten away from home, however, was up 4%. The latter likely reflected the rising cost of labor at restaurants. The price of apparel was up only 0.3% from a year earlier. The prices of used cars were down 10.4% while the prices of new cars were down 1.2%. Airline fares were down 1.2%.
• Looking at the broad categories of consumer spending, prices of durable goods were down 4.2% from a year earlier while prices of non-durables were unchanged. Non-durables excluding food were down 2.3%. Meanwhile, the prices of services were up 4.8% from a year earlier. The biggest component of services is shelter, with prices up 5.2%. Excluding shelter, service prices were up 4.3%. Thus, services remain the main source of inflationary pressure. That likely reflects the fact that services are labor-intensive while labor costs continue to rise.

• The Federal Open Market Committee (FOMC) voted to cut the federal funds rate by 50 basis points (bps) to 4.75%–5.00%. Powell navigated the press conference with agility, pointing to a policy “recalibration” to neutralize monetary policy, instead of a recessionary policy response. The statement was refurbished to signal balanced risks to the dual mandate, and the dot plot now indicates 100bps of rate cuts this year and next.?

China

• In August, consumer price inflation in China reached the highest level since February. The problem is that the highest level was only 0.6%. In part, the acceleration of Chinese inflation reflected a sharp rise in food prices, up 2.8% in August versus a year earlier. Food prices were boosted by extreme weather disrupting food production. When food is excluded, consumer prices were up a much more modest 0.2%. When food and energy prices are excluded, core prices were up 0.3%. Thus, China is just skirting deflation.
• Meanwhile, China’s producer price index fell 1.8% in August versus a year earlier. This was the steepest drop since April. Moreover, producer prices have fallen on an annual basis in every month since October 2022. Producer prices were also down 0.7% from July to August, a very sharp monthly decline. The government reported that the decline in producer prices was especially affected by declining prices of steel-related goods, agriculture, and energy. The continuing decline in producer prices reflects several factors including declining commodity prices, weak domestic demand, and excess domestic capacity. Producer prices feed into consumer prices, which partly explains why consumer price inflation is close to a deflationary level.
• The People's Bank of China (PBoC) was one of many central banks to ease monetary policy this week. In one of the more aggressive rounds of monetary easing in recent years, the PBoC announced a cut in the Reserve Requirement Ratio of 0.50 percentage points, which lowers it to 9.50% for major banks, while also signaling it might cut the ratio again by 0.25-0.50 percentage points, depending on liquidity conditions. The central bank also announced a 20 bps cut in the seven-day reverse repo rate to 1.50% and lowered the 1-Year Medium-Term Lending Facility rate 30 bps to 2.00%, while also signaling that reductions in other benchmark rates such as the Loan Prime Rate and Deposit Rate would be forthcoming.
• Chinese authorities also announced several stimulus measures aimed at supporting the property and equity markets. Existing mortgage rates on outstanding loans will be lowered on average by 0.50 percentage points and the minimum down payment on second homes will be lowered to 15% from 25%. The central bank will also increase its re-lending program for state-owned firms to buy unsold properties. The PBoC will now provide 100% of the principal of bank loans for such purchases, up from 60% previously. The PBoC also announced at least 800B renminbi of liquidity support for equities, while authorities are also considering setting up a stock stabilization fund. China's Politburo—the country's top decision-making committee—pledged to support fiscal spending and stabilize the property sector, though without providing specifics

Commodities

• The movement of commodity price indices was mixed for a fourth consecutive month in August but was heavily skewed towards the downside. The energy, base metal and other mineral price indices experienced declines, while the precious metal index advanced for a second consecutive month. Commodity prices were under pressure throughout the month on concerns over global macroeconomic uncertainties, particularly in China and the US. Nonetheless, they received some support from seasonal demand and Supply constraints. Moreover, the decline of the US dollar against the backdrop of expectations for US interest rate cuts provided more upside support to commodity prices.
• Gold prices rose by 3.0%, m-o-m, in August, while silver and platinum prices declined by 4.2% and 3.4%, m-o-m, respectively, over the same period. Gold prices reached a fresh new high in August supported by risk-averse sentiment. Geopolitical developments, relatively softer US macroeconomic data and expectations on US interest rate cuts elevated gold’s safe haven status.
• Copper prices declined in August, falling by 4.5%, m-o-m, but were up by 7.5%, y-o-y. At LME warehouses, stocks rose in August by 39.1%, m-o-m, and were up by more than 100%, y-o-y
• Aluminum prices receded in August, declining by 0.3%, m-o-m. Prices were up by 9.6%, y-o-y. LME warehouse stocks declined by 8.2%, m-o-m, but they were up by 76.8%, y-o-y
• Lead prices fell in August by 5.2%, m-o-m, and were down by 7.3%, y-o-y
• Zinc prices declined by 2.4%, m-o-m, in August, and were up by 13.0%, y-o-y
• Iron ore prices declined in August, falling by 8.1%, m-o-m, and were down by 6.1%, y-o-y
• The energy price index declined in August after two consecutive months of increases, falling by 3.2%, m-o-m. Declines in average crude oil and US natural gas prices dragged down the index, but losses were offset by gains in coal and EU natural gas prices. The energy price index was down by 5.6%, y-o-y.

Risks

• As inflation moderates and labor market pressures ease further, monetary policy rate cuts should continue, though the timing and scope of reductions will need to remain data-dependent and be carefully judged to ensure underlying inflationary pressures are durably contained.

• In US, the ISM indices have shown the manufacturing and services sectors to be on separate paths over the past two years, both have definitively been on a downtrend, indicating moderating rates of activity as Q3 comes to an end. Ticking higher in August, the headline ISM manufacturing index continues to paint a grim picture for the factory sector, running in contractionary territory for 21 of the past 22 months. Components remain weak, highlighted by production hitting a fresh post-pandemic low and new orders sliding to its lowest reading since May 2023. The mixed performance of the regional PMIs released so far suggests little change occurred from August, with our call of the September headline index at 47.6.
• The headline ISM services improved to a three-month high in August, though service-providers also face their fair share of challenges. Indeed, slow-to-moderate growth has been cited across many service industries in the most recent sentiment surveys, while ongoing high costs and interest rate pressures continue to negatively impact sales. This slower activity continues to hold back hiring, which has implications for consumer spending and the pace and magnitude of impending Fed rate cuts. We look for the headline ISM services index to come in essentially flat in September at a level of 51.7

• The week's Eurozone manufacturing and service sector PMIs for September offered a timely—and somewhat discouraging—insight into the state of the region's economy. The Eurozone manufacturing PMI fell to 44.8, the lowest level since December 2023, indicative of continued contraction in the industrial sector. The details showed a softening in new orders and order backlogs. Among the major countries, German manufacturing remained particularly weak in September while the French manufacturing PMI was more stable. On the services side, the Eurozone PMI fell to 50.5 in September, an eighth consecutive month in expansion territory but still the lowest reading since February 2024. Here too, incoming new business softened, and by country Germany's services PMI fell while France's services PMI reversed the Olympics-related boost seen in August. Taken together, the composite or economy-wide Eurozone PMI fell to 48.9 in September from 51.0 in August, the first reading in contraction territory for the composite PMI since February this year
• In the United States, the yield curve is no longer inverted. In the past, when inversion ended, a recession soon started. The yield curve is the gap between the yields on the 10-year and two-year bonds. For the first time in 26 months, this gap is no longer negative. However, another commonly observed yield curve is the gap between the 10-year yield and the three-month yield. That gap remains inverted. Traditionally, an inverted yield curve has been a good predictor of recession. In most instances in which there was an inversion, a recession followed the end of inversion, although the timing varied. Yet it is important to note that inversion does not cause recession. Rather, it can reflect factors that might cause a recession. For example, inversion often means that there has been a tightening of monetary policy, which involves an increase in short-term interest rates. That happens because the Federal Reserve attempts to quell inflation by restricting credit market conditions. The reversal of inversion comes when investors expect a Fed easing, thereby suppressing shorter-term rates. That is evidently what has happened lately. Moreover, each time there is news about job market weakening, investors appear to boost their implied probability of a rate cut.
• Monetary policy acts with a lag. Thus, the negative impact on the economy might not begin until the policy begins to ease. The argument can be made that, in the current situation, the negative impact of monetary tightening is only now beginning, as evidenced by a weakening of the job market. Thus, even as the Fed soon begins to ease policy, the negative impact of months of high interest rates might continue to unfold. This could mean recession, or it might simply mean a slowdown in growth.

• Geopolitical instability or conflicts, the most-cited global risk since March 2022, is the top concern for global growth.

• In 2023, global public debt as a proportion of GDP stood at 93.2%, up from 84.2% in 2019. This jump is largely a reflection of the fiscal impact of the pandemic, but it is notable that debt-to-GDP ratios fell in 2021-22 before the trend reversed last year as economic rebound effects subsided and government revenues fell. The IMF expects further slippage this year, in part because it is an election year in so many countries, and elections tend to lead to a looser fiscal?stance.36 The level and pace of change in debt levels differ significantly between advanced economies and developing ones.
• Persistently weak growth exacerbates the risks posed by countries’ debt levels, which have increased significantly over the last five?years. Concerns about growing public debt burdens have been elevated for some time, but they have become more prominent as debt ratios have worsened and as elections around the world have highlighted political tensions around the need for fiscal consolidation. Moreover, this year has already seen evidence of the potential for dramatic societal consequences when debt levels are economically unsustainable.
• A more stark potential outcome of prolonged debt unsustainability is default, or a country’s failure to meet at least part of its debt servicing obligations. This is probably a reflection of the extent of the shock that would be required to trigger advanced-economy defaults in the first place.
• The policy implications of the worsening debt outlook are daunting. They are also getting worse. In addition to any adjustments already needed to bring the primary balance into line with debt sustainability, further fiscal consolidation measures will be needed in response to a significant intensification of spending pressures over the remainder of this decade as the fiscal impact of numerous structural economic challenges starts to hit more forcefully. The IMF estimates that by 2030 governments will be spending an additional 7-9% of GDP annually to meet the costs of climate change, ageing populations, industrial policy and economic development. However, it is difficult to envisage the political feasibility of significant fiscal tightening in many countries.

• The U.S. fiscal situation will be under scrutiny during this election, particularly in light of budget deficits that have run north of 6% in recent years. What is concerning is the timing of the deficits as well as their size. This could require more fiscal restraint ahead, limiting the ability for fiscal support if the economy were to decline.

• Related to this, one of the most unnerving implications of the rising global debt burden relates to countries’ lack of preparedness for future shocks. This is an area where the frequent divergence between advanced and developing economies is particularly stark. As noted before, one of the reasons for the sharp increase in government debt over the past five years was the spending required to mitigate the impact of the pandemic. If another such global shock emerges, there will not be the same resources available to cushion its blow. It is not impossible that the next major shock to hit the global economy will also be the trigger for a debt crisis that crystallizes the fiscal risks that have been building over many years. However, strains are likely to emerge even in the absence of a once-in-a-century crisis like the pandemic. There are numerous economic, environmental and societal transitions under way, and all have fiscal implications that policy-makers will have to take into account. If debt sustainability remains a significant constraint on countries’ ability to spend, then countries may struggle to prepare for changes such as the energy transition, demographic shifts, climate-related disasters, rapid technological change and evolving national security needs.
• In the European Union, there is great concern that Europe is in danger of falling behind the United States and China. Growth in Europe has been modest at best. Moreover, the United States and China have collectively been at the leading edge of development of new technologies. Consequently, the EU appointed former ECB President and former Italian Prime Minister Mario Draghi to report on how to address this problem. He has returned from his analysis urging that Europe collectively boost investment by 800 billion euros per year on new technologies. In addition, he urged that the EU ease competition rules to enable more concentration in certain industries such as telecoms and centralize supervision of capital markets.
• This election poses uncertainty, and markets hate uncertainty. However, that election volatility is more reflective of the market repricing potential new policy proposals, instead of an implication that the election outcome represents a win-or-lose scenario. Historically, market volatility has risen leading up to elections and has subsided after.
• Given the tight race, this does raise the question around the possibility of a contested election result. Since World War II, volatility has decreased by an average of 16% in the month following presidential elections. Most recently, the VIX index (a measure of stock-market volatility) declined 36% in the 10 days following 2020′s Trump-Biden election.

• Over the past 80 years, in the one month leading up to presidential elections, the stock market was positive for that month in only slightly more than half the years. However, from the election through year-end, the market was positive during that period in all but three years. It's worth pointing out that the largest post-election (through year-end) gains occurred in (in descending order): ′20, '52, '60, '04, '80, '72, '16, '96, '76, '92. This is composed of five Republican wins and five Democrat wins, reflecting the fact that markets have taken their direction more consistently from broader fundamental conditions than from political parties. ?

• The two worst periods above were the only two terms that experienced a decline. Broad economic trends and market events, not election outcomes, were the primary determinant over these timeframes. Timing and external factors did play a role in the negative periods (tech bubble and housing market crashes, 9/11) while the post-war economic boom of the 1950s shaped the outsized gains in those periods.