World growth is expected to slow further, but the global rate cutting cycle has started

According to the International Monetary Fund (IMF), the world economy is projected to grow by about 3.2% in 2024, with growth in the US projected at 2.6%, China 5%, Japan 0.7% and Germany 0.2%. World growth is largely unchanged from 2023 and is below the 15-year average of 3.4%. However, it is still respectable, given the elevated level of global interest rates over the past 18 months and persistent regional conflicts in the Middle East and Eastern Europe.

Fortunately, global inflation has slowed meaningfully over the past 18 months, falling from over 8% at the start of 2023 to 3.4% in June 2024. This compares with a long-term average of 2.7%. The slowdown in inflation is reflected in both developed and emerging economies. At the beginning of 2023, developed market inflation was measured at 7.7%, but this has since moderated to 2.6%. Inflation in emerging economies started 2023 at 8.9%, but is now down to 4.6%. 

While more work needs to be done to get global inflation fully under control, many countries have already embarked on an interest rate cutting cycle. In fact, over the past 12 months, a total of 38 central banks have commenced their own interest rate cutting cycles. This is measured out of a total of 80 central banks that we monitor on a regular basis. At least 18 of these central banks have cut rates on three or more occasions in the past year, all of which are either emerging economies or developing countries. These rate cuts were implemented prior to the start of the European Central Bank’s rate cutting cycle and, in general, preceded all the recent rate cuts in developed markets – which now include Switzerland, Sweden, Denmark, Canada and the Eurozone.

Most central banks, including the US Federal Reserve (Fed) and the South African Reserve Bank (SARB), are expected to either continue or start cutting interest rates in the second half of 2024 and into 2025.

The US economy is showing signs of slowing, but inflation continues to moderate

An increasing array of US economic data is signalling a slowdown in economic activity. This includes industrial production, housing construction, vehicle sales and the unemployment rate. At the start of 2024 the US unemployment rate was measured at a very impressive 3.7% but has since risen to 4.1%. It is likely to increase further over the coming months.

The US is still adding a significant number of jobs each month, but the rate of increase in employment has slowed over the past six months. In addition, the number of job openings has fallen and the corporate sector’s intention to hire has moderated. A large percentage of the recent job gains were in the non-cyclical sectors of the economy, including healthcare and government. Remarkably, over the past 18 months, the US government has added one million jobs, taking government employment to a record high of 23.364 million, or the equivalent of 14.7% of total employment. Furthermore, US government activity has grown by a remarkable 6.8% since the beginning of 2022, outperforming the overall growth in GDP (4.7%), and contributing almost 25% of GDP growth over the past 18 months.

A key area of focus in the labour market, especially from an inflation perspective, remains the increase in wages. In June 2024, average hourly earnings for all employees rose by a modest 0.3% to $35. Over the past 12 months, average hourly earnings have increased by 3.9%, which is down from 4.1% in May and 4.4% at the start of 2024. Wage growth of 3.9% is still on the high side, but a lot more palatable than the 4.4% measured at the start of 2024. Ideally, wage growth needs to slow to below 3.5% on a sustained basis to fully ease inflation concerns.

Fortunately, US headline inflation continues to moderate, dropping to a modest 3% in June 2024, which is its slowest rate of increase in more than three years. While 3% is still appreciably above the Fed’s inflation target of 2%, the expectation is that inflation will continue to slow over the coming months, allowing the Fed to commence its long-awaited interest rate cutting cycle in the third quarter of 2024.

Eurozone economy slowly emerging from a period of stagnation as interest rate cuts begin

Eurozone economic activity grew by a slightly more encouraging 0.3% quarter-on-quarter in the first three months of 2024, allowing the region to avoid slipping into recession. This is the fastest pace of growth the Eurozone has recorded since the third quarter of 2022.

Despite the first quarter improvement in economic activity, a range of high-frequency economic indicators continue to indicate that the region is lacking momentum. Growth is hampered by weak business and household confidence, which are being undermined by the ongoing war between Russia and the Ukraine.

Fortunately, the recent slowdown in inflation, coupled with further interest rate cuts (especially in 2025), should boost real income growth and support higher economic growth. Consequently, Eurozone GDP is expected to grow by 0.8% in 2024, before improving to 1.4% in 2025.

Eurozone consumer inflation slowed to 2.5% year-on-year in June, down from 2.8% at the start of 2024 and well below the 2022 average of 8.4%. Fortunately, the downward trend is expected to continue over the coming months, although at a modest pace, given the stubbornly high level of services inflation, allowing the inflation rate to reach the ECB’s target of 2% in 2025.

In June 2024, the ECB decided to cut its benchmark interest rate for the first time since 2016, bringing its refinancing rate down 25 bps to 4.25%. Crucially, various statements by several members of the ECB’s governing council suggest that the pace of rate cuts is likely to be slow until there is a more meaningful moderation in services inflation.

China’s economic growth remains disappointing, requiring additional government support

China’s GDP grew by 0.7% quarter-on-quarter in the second quarter of 2024, which was significantly slower than the prior quarter’s expansion of 1.6%. This shows that the country is struggling to maintain the momentum established during the first three months of the year and that the government’s effort to boost household consumption has been relatively ineffective. In fact, the latest GDP reading is the weakest growth rate China has recorded since the second quarter of 2022.

The latest high-frequency economic data continues to suggest that the Chinese economy is still struggling to gain momentum. For example, China’s June PMI data was disappointing, with the manufacturing index remaining in contractionary territory for the second consecutive month, at 49.5 points, while the non-manufacturing PMI recorded a sharp slowdown to 50.5. Meanwhile, the economy is still facing serious headwinds as a result of the ongoing weakness in the housing market, which is undermining economic confidence more broadly.

The pronounced slowdown in economic activity in the second quarter of the year has intensified concerns that Chinese economic growth could miss its target growth of 5% this year. The economy is currently forecast to grow by 4.8% in 2024, before moderating to 4.4% in 2025. An improvement in household consumption and stabilisation of the property sector are key to re-invigorating the Chinese economy.

China’s headline consumer inflation rate weakened in June to a mere 0.2% year-on-year, highlighting that pronounced deflationary pressures are still present in the economy and are aggravated by persistently weak domestic demand. Headline inflation has been below the People’s Bank of China’s (PBoC) implicit target of 3% for more than two years. Core inflation also remain subdued, having been at or below 1% for 23 of the last 24 months.  

While the current supply-centric policies and limited economic rebalancing can sustain 4% economic growth in the short term, a full and more convincing economic revival still rests on improving domestic demand. This, along with current deflationary risks, require more forceful monetary policy action. Unfortunately, the PBoC has been slow to act, having left the one-year medium-term lending facility (MLF) rate unchanged for 10 months. It only cut the Reserve Requirement Ratio (RRR) and one-year loan prime rate once this year, with no cuts implemented since February.

Given the current economic environment, the PBoC is expected to cut both the RRR and one-year MLF rate in the third quarter of 2024. However, it remains to be seen whether this will be enough to shore up confidence.

SA’s government of national unity has lifted investor sentiment

In the first quarter of 2024, South African GDP declined by a disappointing -0.1% quarter-on-quarter. This compares with a revised increase of 0.3% in the final quarter of 2023. Over the past year, the South African economy expanded by a mere 0.5%, after growing by a revised average of 0.7% in 2023. This is SA’s worst annual economic performance since the Covid-induced decline in 2020.

In the first three months of 2024, SA’s economic performance was mainly hurt by declines in construction (-3.1%), mining (-2.3%) and manufacturing (-1.4%). Fortunately, these declines were partly offset by a welcome 13.5% increase in agricultural output, which included increased production of fruit and vegetables. The retail and accommodation sector recorded growth of 0.1% in the quarter. This was helped by wholesale trade and the accommodation sector, but not retail sales, which declined in the quarter. According to Statistics SA, household consumption expenditure fell by 0.3% in the first quarter, weakened by recent declines in household disposable income and sustained high interest rates.

Despite the decline in GDP in the early part of 2024, the overall value of economic activity remains above the level that prevailed prior to the start of Covid, but only by a very small margin (1.1%). In the meantime, SA’s population continues to grow by well over 1% a year. This results in declining income per person, a further increase in social discord, and an increasing risk of social unrest – especially if the newly-formed political coalition is unable to make progress in revitalising economic activity and job creation.

SA has the potential to lift its economic growth rate more meaningfully over the next 18-36 months, helped by a sustained scaling back of electricity outages, a reduction in interest rates over the next 18 months, an ongoing improvement in the tourism sector and further policy reform that encourages the private sector to participate in the renewal of the energy, port and rail sectors. However, this more positive outlook is highly dependent on the political coalition remaining stable, with the government continuing to support the use of private/public partnerships as a key initiative to help develop ailing infrastructure.

In May 2024, SA’s headline consumer inflation rate rose by a modest 0.2% month-on-month, keeping the annual rate of inflation unchanged at 5.2%. At the same time, core inflation rose by only 0.1% in the month, with the annual rate of increase unchanged at a respectable 4.6%. Core inflation has been inside the inflation target range of 3% to 6% for the past 37 months, which argues strongly in favour of interest rate cuts, considering that the repurchase rate (repo rate) is currently well above the rate of inflation, at 8.25%.

The SARB kept the repo rate unchanged at its Monetary Policy Committee (MPC) meeting at the end of May 2024. It stressed that, while the outlook for inflation has improved, inflation expectations remain elevated relative to the 4.5% midpoint of the inflation target. According to the governor of the SARB, “the task of achieving our inflation objective is not yet done”.

This suggests that the bank is likely to keep interest rates elevated for a few more months. However, the inflation rate is expected to slow further over the coming months, helped by a recent reduction in the fuel price and strengthening of the rand/dollar exchange rate. This should allow the MPC to start cutting rates by 25 bps at its policy meeting in September 2024, and continue to cut interest rates well into 2025.