Economic Update - November 2024

Whether it is retail sales in Australia and China, consumer spending in Japan, increased GDP growth in the euro area, or a jubilant stock market in the US, there is suddenly more optimism in the air.

Of course, there is also increased policy uncertainty over Trump tariffs 2.0, however, we can worry about that after Christmas when President-elect Trump rightfully ascends to Capitol Hill on inauguration day. 

What happened in Australia?

Decreasing petrol prices and government rebates for electricity kept inflation to 2.1% in October in annual terms - unchanged from September (see chart below).

However, the impact of these temporary rebates is an example of why the RBA is more interested in its preferred inflation measure: the annual trimmed mean, which excludes big increases and falls in prices at the margins, like the electricity rebates. In October, the trimmed mean increased from 3.2% to 3.5%. CPI excluding volatile items and holidays (but not electricity rebates) fell from 2.7% to 2.4%.

“While these temporary factors have undoubtedly helped many Australians, our approach is

to look through them to some extent to better understand where inflation will settle in the medium term.” Michele Bullock, Address at the Committee for Economic Development of Australia (CEDA) Annual Dinner, 28 November 2024.

The RBA has forecast consumer demand to build momentum from the December quarter into next year, as increasing wages, lower inflation, the stage-three tax cuts, and wealth-effects from rising house prices play their part. With this increased demand, headline inflation is also expected to rise again in 2025 before finally falling below target in late 2026.

A third consecutive monthly increase in retail turnover to a 17-month high of 3.4% in October fits the story of increasing consumer demand, as does a two-and-a-half year high in consumer confidence (see chart below).

According to the ABS, consumers started spending in October ahead of Black Friday and other November promotions. Spending on ”other retail”, which is dominated by ecommerce-only stores, increased by 1.6% in monthly terms while household goods retailing increased by 1.4%. Electrical goods and audio-visual products were hot items - Christmas stockings will be full this year. 

The labour market is little changed. The quarterly Wage Price Index continued to fall in the September quarter (see chart below).

The RBA will be watching the strength of the consumer upswing closely before it decides on any interest rate cuts next year.

What happened around the world?

USA

The Trump trade is back on. After a small decrease in October, the S&P 500 had its best month of the calendar year in November, increasing by 5.7%. Falling bond yields also reflect the new level of optimism about the economy (see chart below).

While no one is sure how Trump tariffs 2.0 will play out, they are certain that Trump is good for business in the short term. The market was also reassured by the nomination of hedge fund operator Scott Bessent for treasury secretary.

September quarter GDP came in as expected at a strong 2.8% on an annualised basis (see chart below).

While the Fed’s preferred inflation measure PCE increased from 2.1% in September to 2.3% in October, this was in line with market expectations.

The Fed is still likely to cut rates again by another 25 bps in December after its cut in November  but the buoyancy in the markets and the higher PCE has weakened the market’s conviction slightly: the CME’s FedWatch tool has the probability of a 25 bps cut in December at around 72%, down from 82% a month earlier. If not December, then expect a post-Christmas cut in the New Year.

China

The recent stimulus is having a positive impact with a 4.8% increase in retail sales in October beating estimates and representing an 8-month high.

Exports recorded a 27-month high, increasing by 12.7% in October in annual terms (see chart below).

House prices continued to fall in September but did so at a slower rate.

House prices and tariffs will likely be at the top of the agenda when the annual Central Economic Work Conference meets in the second week of December. Markets will be hoping for increased stimulus measures but knows that the Party likes to do things in its own time.

The mood is more buoyant than it has been for a while but there is some anxiety over the change in the US administration and the potential impact for exports.