Economic data released in July show soft global economic growth, some easing of tight labour markets but still patchy progress reducing inflation. After the first cuts in official interest by some central banks in June, few have been able to follow up with cuts in July. The Bank of Canada has cut again, by 25bps to 4.50% while the Peoples’ Bank of China cut 10bps to 3.85%, a small cut given China’s very low inflation rate and persistent problems dampening growth prospects. Neither the US Federal Reserve (Fed) or Australia’s RBA have been able to cut their official interest rates, although the Fed appears close to cutting for the first time, while the RBA is torn between whether staying on hold or a rate hike is in order because Australian inflation looks more entrenched than elsewhere.
In the United States, Q2 GDP growth was firmer than expected, up 2.8% annualised compared with 1.4% in Q1. Annualised real consumer spending firmed to 2.3% annualised from 1.5% in Q1. Consumer spending supported by growth in household income and wealth remains a mainstay of the relatively better US economic growth rate compared with other major economies. Other US economic indicators released in July point to relatively strong US consumer spending coming under pressure in the months ahead. Personal income in June was up only 0.2% m-o-m and consumer sentiment slipped further in July, down to 66.4 from 68.2 in June and well down from readings in the mid-to-high 70s in the early months of 2024.
Other indicators released in July pointing to softer US economic growth ahead include sub-50 (the expansion/contraction boundary) readings for the June ISM manufacturing index, 48.5 down from 48.7 in May, and the June ISM non-manufacturing or services PMI, down to 48.8 from 53.8 in May. Housing indicators were mixed in June with sales of new and existing down respectively 0.6% m-o-m and 5.4% but with home building permits and starts up respectively 3.4% m-o-m and 3.0%.
The US labour market, while still quite tight, is turning a little softer. Non-farm payrolls in June rose by 206,000 after a downwardly revised 218,000 lift in May. The unemployment rate edged up to 4.1% from 4.0%. The unemployment rate is up more than 0.5 percentage points from its cycle low point, a marker for Fed policy easing in the past. Also, high wage growth is moderating with June average hourly earnings up 3.9% y-o-y from 4.1% in May. Inflation was also lower in June with the CPI up 3.0% y-o-y from 3.3% in May and the Fed’s preferred inflation, the core personal consumption expenditure deflator steady at 2.6% y-o-y in June. Inflation remains above the Fed’s target of 2.0% but the prospect of slowing growth ahead and progress reducing inflation point to the Fed cutting the Funds rate (currently 5.50%) by 25bps either at its meeting this week or at the following meeting in September.
In China, forces remain evident driving excess capacity, faltering economic growth and low inflation bordering deflation. June economic readings were again comparatively soft. Q2 GDP growth was lower than expected at +0.7% q-o-q, +4.7% y-o-y from +1.5% q-o-q, +5.3% y-o-y in Q1. June economic readings continued the softer theme with decelerating industrial production, +5.3% y-o-y (May +5.6%); fixed asset investment spending, +3.9% y-o-y (May +4.0%) and retail sales, +2.0% y-o-y (May +3.7%). In a world where economic growth is slow presenting a head wind to China’s one economic bright spot, export growth, +8.6% y-o-y in June (May +7.6%), China needs to lift domestic spending, especially consumer spending given that it can do little to prime the giant residential construction sector still beset by over-supply. China’s consumers, however, are reluctant to spend after the hit to their wealth from falling property prices. The official measure of house prices showed an accelerating decline in June, -4.5% y-o-y from -3.9% in May. What stimulus measures are in place to combat China’s economic malaise look woefully inadequate. The Peoples’ Bank of China cut its official interest rates 10bps in July to 3.85% for the deposit rate and 3.45% for the lending, but both rates still sit more than three percentage points above China’s CPI inflation rate at 0.2% y-o-y in June (May 0.3% y-o-y).
In Europe, economic reports released in July hint at weak but improving economic growth, helped by retail spending driven by strong growth in tourists. May retail sales lifted 0.3% m-o-m after an upwardly revised 0.6% increase in April. Europe’s purchasing manager indices point to weak manufacturing activity, July PMI 45.6 from 45.8 in June but firm services sector activity, July PMI 51.9 from 52.8. Relatively strong services sector activity is keeping Europe’s labour market tight. The unemployment rate at a quarter-century low of 6.4% in May is maintaining pressure on wage settlements running above 5% y-o-y. While inflation is moderating with the CPI at 2.5% y-o-y in June and close to the European Central Bank’s (ECB’s) 2.0% target, the risk is that wage pressures could generate a rise in inflation and that risk grows if Europe’s slow economic growth rate improves. The ECB cut official interest rates for the first time in this cycle by 25bps in June, but then held rates unchanged (deposit rate 3.75%) at the July meeting, an indication of the slow and faltering rate cutting path ahead.
In Australia, inflation is showing signs of holding up higher for longer. The monthly CPI showed annual inflation falling to a low point of 3.4% y-o-y back in February. Since then, inflation has lifted to 3.5% in March, 3.6% in April and then a worrying jump to 4.0% in June. The Q2 CPI report due this week will determine whether the RBA can stay on hold at 4.35% cash rate or will hike at its August policy meeting. We expect the Q2 CPI to come in at 1.0% q-o-q, 3.8% y-o-y from 1.0% q-o-q, 3.6% y-o-y in Q1. We also expect 1.0% q-o-q increases in both the trimmed mean and weighted median underlying inflation measures lowering underlying annual inflation nearer to 4% from 4.4% in Q1. Our Q2 inflation expectations make it a close call whether the RBA stays on hold or hikes in August. We lean narrowly towards the RBA staying on hold.
Our on-hold RBA call is supported by economic releases in July showing still soft economic growth and a hint of softer labour market conditions, making it possible to read through current high inflation readings. Retail sales rose by 0.6% m-o-m in May, a quite firm result but underpinned by special sales. Real retail sales in Q2 (out this week) are likely to show a small increase at best. Strong home buying activity through 2023 and early 2024 appears to be on the cusp of a softer turn after weaker May housing finance commitment numbers, -1.7% m-o-m by total value and falling auction clearance rates through July.
The labour market looks less tight with the unemployment rate edging up to 4.1% in June from 4.0% in May. Job vacancies have been falling in recent months and business surveys are pointing to less strong demand for labour. The RBA, after accounting for these signs of soft growth and a less tight labour market will still be keeping in mind the impact of expansionary government policies, including the July 1st tax cuts, that could underpin demand and potentially inflation. It is, as mentioned earlier, a close call whether the RBA stays on hold or hikes at its meeting next week. What is more certain, is that Australia’s relatively high and sticky inflation rate means that there is little chance that the RBA will be able to start cutting the cash rate below the current 4.35% this year, or even through the first half of 2025.