Economic Update - December 2024

Inflation is rearing its ugly head again in the US and UK. Santa may find that the fire at the end of the chimney is hotter than he bargained for! Meanwhile, in Australia, the RBA has signalled that interest rate cuts are on their way as the Australian economy gradually slows. China continues to face choppy waters.

What happened in Australia?

While the RBA kept interest rates steady in December, Governor Michele Bullock made it clear that the Board was now leaning towards cutting rates given softer economic data.

“The private sector is very weak and the public sector is filling a gap there. With that configuration … our forecasts see inflation coming back down.” Michele Bullock.

September GDP was released a week before the Board decision. Not only was the 0.8% annual growth (see chart below) below market expectations of 1.1%, but it was also the weakest result since December 1991. GDP per capita also decreased for the 7th-consecutive quarter.

Further, the growth was mostly driven by public spending with household consumption and private investment weak (see chart below).

If household consumption does not recover in the December quarter and in the first half of 2025 as the RBA has forecast then the RBA will likely bring forward its first interest rate cut.

Adding to the picture of slowing growth was the latest migration figures showing a continuing trend of decreasing net migration (see chart below). While this takes some steam out of the housing market, it will also take steam out of the economy more generally.

With Australia’s economic data on the softer side and Jerome Powell more hawkish than expected following Fed’s December rate decision, the AUD-US cross rate fell to its lowest levels in over 2 years in the second half of December. 

What happened around the world?

USA

While US non-farm payroll and unemployment in November was a little softer than expected, inflation and the Federal Reserve’s preferred inflation measure, PCE, were higher for November (see chart below).

So after cutting rates by the expected 25 bps, Jerome Powell’s pronouncement that the FOMC "would be more cautious going forward” and with the FOMC’s dot plots jumping higher for 2025 (see chart below), the market realised that inflation may not yet be under control and that there will be less rate cuts in 2025 than they thought.

As a result, US stocks readjusted downwards and there has been a sell-off in longer-term US government bonds, resulting in a steepening of the yield curve (see second chart below).

China

The Central Economic Work Conference held its annual conference in December to set the economic agenda over the next year. It came out with promises of increased fiscal spending to match recent stimulus from the PBOC.

However, more may be needed if China is to push through what President Xi Jinping recently called “high winds, choppy waters, and even dangerous storms”.

China’s retail sales increased 3% in November on an annual basis well below the expected 4.6% suggesting that Chinese consumers are still wary.

Further, rumours of potential defaults with the mainland’s 4th-largest developer China Vanke and Hong Kong’s New World Development confirm that the problems in the property sector are far from over.

There are also signs that Trump’s threatened tariffs are leading to flight by foreign investors (see chart below). 2025 does not promise smooth sailing for China.

EU

The ECB cut interest rates by 25 bps in December, the fourth cut this year. It believes that the “disinflation process is well on track” and that the economic recovery will be slower than previously thought.

November’s inflation was higher at 2.2% compared to October’s 2% and marked the 2nd month of increasing inflation. However, inflation remains close to the ECB’s target of 2%. Further, hourly wage costs decreased for the first time in 2024 during the September quarter (see chart below).

Japan

Despite an upward revision of September quarter GDP from 0.9% to 1.2% earlier in the month, BoJ Governor Kazuo Ueda did not get his rate increase in December. However, a summary of the December BoJ Board meeting reveals that many Board members are keen to raise rates but just need more time to assess the economic policies of incoming US President Donald Trump.

UK

The BoE kept interest rates steady in December with inflation increasing for the second consecutive month in November to 2.6% on an annual basis: up from 1.7% in September, and 2.3% in October. Concerns over reemerging inflation were tempered by a downward revision of September quarter GDP from 0.1% to zero. The BoE also revealed that it now expects growth to be lower in the last quarter of the year compared to what it thought in November.

New Zealand

The Reserve Bank’s recent interest rate cuts are warranted with GDP decreasing in the September quarter by a huge 1% compared to the previous quarter. The market had only expected a decrease of 0.2%

What this means for Australian Private Debt

The Australian economy remains on the RBA’s narrow path with a gradually slowing economy to be met with interest rate relief next year. The Australian economy thus continues to provide stability in addition to its relatively high rates for private debt investors.