The global economic growth outlook took a brighter turn in October aided by the US Federal Reserve starting to cut rates as the US economy continues to grow above long-term trend and an opaque set of economic stimulus measures to boost China’s flagging economy. Australia’s economic data released in October was also mostly firmer than expected. The better growth outlook and data, however, also called into question whether those central banks that have started to cut their official interest rates will be able to continue cutting at the pace a previously gloomier economic outlook might have dictated and in Australia the market pushed out the prospect of the first rate cut by the RBA towards the middle of 2025. The changing outlook for official interest rates pushed up government bond yields sharply in October.
In the United States, economic growth appears to be stabilising and possibly firming in Q3. The advance Q3 GDP report is due on Wednesday and is expected to show 3.0% annualised growth, the same as in Q2. Trackers of Q3 GDP using the latest monthly economic reports and surveys and put together by the likes of the Atlanta Federal Reserve are a little higher running at 3.3%. Some key US economic report reports and surveys released in October showed surprising strength including leading indicators of service sector activity in the US as well as lagging indicators such as non-farm payrolls and the unemployment rate.
The September ISM non-manufacturing (services) sector purchasing managers’ index jumped up from 51.5 in August to 54.9 in September, a high index reading which in the past has pointed to strong activity ahead. Looking at where the US economy has been, September non-farm payrolls lifted strongly by 254,000 after an upwardly revised 159,000 lift in August. For a second consecutive month the unemployment rate edged downwards to 4.1% in September from 4.2% in August and 4.3% in July.
Progress reducing US inflation appeared to stall in September with the CPI up 0.2% m-o-m, 2.4% y-o-y from +0.2% m-o-m, 2.5% y-o-y in August. The core CPI, excluding food and energy prices was stickier than the headline CPI, up 0.3% m-o-m in September and taking the annual change up to 3.3% y-o-y from 3.2% in August. The Federal Reserve is facing the prospect of continuing above-trend demand in the US economy, an approaching presidential election where neither candidate is committed to reducing the large size of the US budget deficit and the Middle East on the brink of worsening conflict that threatens to reduce global energy supply and push up currently low prices containing inflation. Recent bond market concern seems warranted that future Fed rate cuts may not go as far as previously expected.
In China, most economic indicators released in October although a little stronger than expected were still weak. Q3 GDP came in at +0.9% q-o-q, +4.6% y-o-y not much different from Q2 at +0.7% q-o-q, +4.7% y-o-y and tracking below the 5% growth rate the authorities have in their plan for 2024. The September month readings were still soft. CPI inflation was 0.0% m-o-m, reducing annual inflation to only 0.4% y-o-y from 0.6% in August. Producer prices are falling at an increasing pace, -2.8% y-o-y from -1.8% in August. Exports, up 2.4% y-o-y in September, and imports, up only 0.3% y-o-y, are both weak. House prices continued to fall at an accelerating annual rate, -5.8% y-o-y from -5.3% in August. Minor improvements showed in September industrial production up to +5.4% y-o-y from +4.5% in August, retail sales, +3.2% y-o-y from +2.1% in August, and the unemployment rate down to 5.1% from 5.3% in August. Fixed asset investment spending trod water at +3.4% y-o-y in both August and September. The PBOC reduced interest rates further by 25bps in October taking the prime loan rate down to 3.60% still high in real terms after allowing for inflation at only 0.4% y-o-y. The authorities announced the general areas of focus for fiscal spending initiatives but no details. An opaque fiscal spending program is better than no spending program but is still running the gauntlet of weak Chinese consumer sentiment.
In Europe, the European Central Bank cut official interest rates by 25bps in October taking the deposit rate down to 3.25%. This is the third rate cut in the current cycle from the ECB and is in response to weak economic growth – Q3 EU GDP out this week is expected to show only +0.2% q-o-q, +0.8% y-o-y growth with Europe’s biggest economy, Germany, still in recession – and CPI inflation that has fallen below 2.0% y-o-y (1.7% y-o-y in September, although with core inflation still above 2.0% at 2.7%). Europe still has relatively low unemployment at a quarter-century low 6.4% in August and some life in the services sector where the purchasing managers’ index still sits above the expansion/contraction marker of 50.0 at 51.2 in October. What signs of life there are in Europe’s economy are a mixed blessing as they may cause inflation to lift back above 2.0% y-o-y compromising the ability of the ECB to cut interest rates further.
In Australia, the RBA’s November 5th policy meeting is approaching when it will also release revised economic forecasts in the quarterly Monetary Policy Statement. During October, several stronger-than-expected economic reports have highlighted that the RBA will need to revise upwards and possibly substantially some of the economic forecasts contained in the previous Monetary Policy Statement released in August. All the forecasts relating to the labour market relating to the end of 2024 and possibly June 2025 need to be revised upwards (stronger). The September labour force report showing employment up 64,100, a record 67.2% participation rate and the unemployment rate low and steady at 4.1% torpedoed the RBA’s August forecast that employment growth will slide to 1.9% y-o-y in December 2024 (in September it is 3.1% y-o-y) and makes unlikely a further slide to 1.2% y-o-y for June 2025.
Material upward revision to the RBA’s near-term employment growth forecasts will cascade to downward revision to their unemployment rate forecasts and possible upward revision to wage growth forecasts and inflation forecasts. These revisions cement the RBA’s commitment to leaving the cash rate unchanged at 4.35% not just in November, but in the next few policy meetings through to the middle of 2025.
Other stronger than expected Australian economic reports released in October include August retail sales, up 0.7% m-o-m, which when combined with a surprisingly strong lift in October Westpac consumer sentiment, up 6.2% m-o-m implies improving consumer spending through Q3 which in turn should help to lift GDP growth in Q3 (report due in December). Australia’s firming growth prospects and continuing tight labour market conditions means that the reduction in annual CPI inflation in the August monthly reading down to 2.7% y-o-y and likely to show in both the September month and Q3 readings out this week are unlikely to last. This too will be reflected in the RBA’s November economic forecasts that are likely to show annual CPI inflation bouncing from under 3% y-o-y through to June 2025 to well above 3% in the second half of 2025. We do not see the RBA being in a position to cut the 4.35% cash rate until at least May next year and the increasing risk is that it may take even longer before cutting.