Economic Update - September 2024

Even when central bankers are surprised, they do so conservatively. Jerome Powell cut rates 50 bps but then did his best to allay any concerns that the US economy is secretly worse than it seems. Meanwhile, in Oz, the RBA remains alert but not alarmed. The economy is slowing but demand still outstrips supply which keeps stoking inflationary pressure. The RBA will keep following the data carefully and hope for no nasty inflation surprises. Meanwhile in China, the government finally decided to throw the sinking economy a stimulus lifeline.    

What happened in Australia?

While Treasurer Jim Chalmers politely said that the RBA is “smashing the economy” with higher interest rates, Governor Michele Bullock reiterated that she does not see a rate cut happening this year.

The RBA can see that the economy is slowing, June GDP grew just 0.2% compared to the previous quarter (see chart below). But growth is not slowing enough to bring aggregate demand below aggregate supply and until that happens, the RBA is wary of inflationary pressures bubbling away on the stovetop.

Unhelpfully, the main driver of growth in the June quarter was public spending at 0.4% on a quarterly basis. Chalmers may be complaining about high interest rates but the government could do more on the fiscal side to bring demand down.

Source: AFR

Monthly CPI fell from 3.5% in July to 2.7% in August on an annual basis, its lowest level since August 2021. This is a welcome result but don’t expect the RBA to get too excited.

The fall in inflation was largely driven by a fall in petrol (-7.6%) and electricity prices (-17.9%). Electricity prices fell precipitously mostly because of the federal government’s one-off rebate.

Unfortunately, underlying inflation remains too high. The RBA’s preferred measure of the trimmed mean fell from 3.8% in July to 3.4% in August (the orange line in the chart below).

Source: ABS

At her media conference after the Board decision, Bullock said that she expects services inflation to fall over the next year as demand falls back down towards supply.

However, rent and new dwellings are two areas where demand and supply are unlikely to meet anytime soon. Together these two items represent around 11% of the CPI basket.

Rent as measured in CPI lags actual advertised rents because only a small percentage of all rental properties have their leases updated during a month or quarter. Recent research by the RBA shows that advertised rents keep going up and are much higher than rent measured by the CPI (see chart below). This suggests that rental prices will continue to be a drag on overall inflation even as services inflation subsides.

Source: RBA

What happened around the world?

USA

After staying put last month, Jerome Powell cut the fed funds rate by 50 bps in September. The US stock market tends to perform badly in September, but the “Powell put” and his assurances that the economy was still looking good for a soft landing spurred the markets to a record high in the month.

Non-farm payroll hit a three-year low in August while the Fed’s preferred inflation measure, PCE,  fell from 2.5% in July to 2.2% in August (see chart below).

After the ongoing debate as to whether the Fed would cut rates 25 or 50 bps in September, October looks like more of the same. Powell has come out and said that he expects that the Fed will only cut rates by a further 50 bps this year rather than the 75 bps the market was expecting. Despite this the market still believes that a 75 bps rate cut has a roughly one-in-two chance. 

China

September looked like another month of pallor for the Chinese economy. Inflation missed expectations and grew just 0.6% in August on an annual basis (read deflationary). JP Morgan removed its buy recommendation for Chinese stocks (joining UBS and Nomura), and even Tiffany’s decided to reduce its floor space in Shanghai!

However, the stock market and economy have been given a shot of optimism with the government announcing the sort of stimulus measures that investors have long been clamouring for. This included a proposed reduction in the benchmark repo rate, a decrease in the reserve requirements for banks, and a 50 bps reduction on average interest rates for mortgages.

“This is the most significant PBOC stimulus package since the early days of the pandemic," Julian Evans-Pritchard, analyst, Capital Economics.

The Chinese stock market reacted by reaching its highest levels in over a year (see chart below). However, some commentators believe it is too little too late in helping China reach its GDP growth target of 5%.

Shanghai Composite Index - Daily Close

Source: TradingView

EU

The ECB cuts interest rates by 25 bps at its September meeting. While it expects inflation to increase slightly later this year, it believes that inflation is on track to fall below its target of 2% by the second-half of 2025. Euro area inflation in August fell to 2.2%.

The EU wants to support the economy as it is “slowing more than expected”. The ECB believes the euro area will grow only 0.8% in 2024 and 1.3% in 2025.

Japan

Japan’s real wages increased for the second month in a row which is a big win in the BOJ’s hopes for a virtuous cycle of rising wages, spending, and inflation (see chart below). 

However, real spending increased only 0.1% in July while June-quarter GDP was revised down slightly.

Ultimately the BOJ decided to keep rates on hold at its September meeting citing overseas economic developments and the exchange rate as significant factors weighing against another rate rise. The yen continues to appreciate versus the USD and has increased around 12% since early July.

UK

After cutting rates by 25 bps in August, the BOE kept rates on hold in September, citing no material changes in the economy. Inflation was unchanged at 3.1% in August while average weekly earnings continues to fall (see chart below).

New Zealand

New Zealand’s GDP fell into negative territory, decreasing 0.2% in the June quarter (see chart below). In another sign of economic weakness, house prices fell for the sixth-consecutive month.

What this means for Australian Private Debt

With the Fed cutting interest rates by 50 bps and Powell indicating another 50 bps by the end of the year while the RBA is expected to keep rates on hold during that period, Australian private debt has become more attractive.