Asset Management: Monthly Macro Insights - September 2024

Global growth is decelerating, but investors expect it will pick up as the impact of monetary policy easing gains traction early next year. Yet, soft landings are hard to track as the early signs of a deceleration look painfully similar to a slide into recession.

Murky outlook in the US

Relative to its potential path, the US is one of the only advanced economies to have generated a complete post-pandemic recovery. More recently, US GDP grew 3 per cent q/q annualised in Q2-2024, outperforming all G7 countries. However, downside risks are mounting.

Although the momentum of consumer spending has been solid, the saving rate dropped to 2.9 per cent in August, one of the lowest levels in history. In fact, households have been drawing down on savings to maintain spending, which could imperil future consumption. More importantly, the labour market shows clear signs of weakening. With the Fed facing the choice of a quarter or half point reduction at the September 17-18 meeting, the latter could be ill received by financial markets as it would suggest genuine concern regarding the health of the economy. Meanwhile, investors expect around -250bps in the federal funds rate by the end of 2025, a pace never seen outside a recession. Will this time be different?

Anaemic growth in Eurozone

Eurozone economic growth remained weak in Q2-2024, with GDP rising a mere 0.8 percent q/q annualised after 1.3 per cent in the prior quarter. The details showed significant weakness in domestic demand, both driven by the household and business sectors, while exports were the only bright spot. According to the latest business confidence index, August saw a small uptick in economic activity as the composite PMI rose 0.8pt to 51. However, the improvement was driven by the services sector (+1pt to 52.9) which was largely due to the strong rebound in France (+4.9pts to 55), likely influenced by the Olympics. The big question is whether this boost is sustainable amid high political uncertainty.

China deflation risk grows

In China, weak domestic demand has led to intense price wars in several sectors. At a mere 0.3 per cent in August, core inflation cooled to the weakest in more than three years, while producer prices in manufacturing industries fell more sharply, suggesting heavier pressure on consumer goods inflation ahead. Overall, the deflationary pressure is becoming more entrenched and is denting China’s chances of hitting its growth goal of about 5 per cent, as consumers delay purchases and businesses slash wages.

Overall, central banks have been signalling they are firmly on course to lower – or continue lowering – interest rates in the coming months, marking the beginning of the end of an era of high borrowing costs. However, tremendous uncertainty and risks remain, with policymakers refrained from offering much guidance on how quickly they intend to proceed in lowering rates over the next several months.