As we approach the final quarter of 2024, the global economic landscape remains unusual. Supply constraints such as deglobalisation, protectionist policies such as tariffs as well as shrinking working-age populations have led to higher inflation and interest rates. However, more subdued growth compared to pre-pandemic decades has created challenges for policy makers.
Australian Economy
In Australia, the situation is challenging for policymakers, with the per capita recession being the deepest and longest in history. However, this is a recession without collapsing corporate earnings and rising unemployment. Australia’s unemployment rate remained steady at 4.2% in August 2024. The number of employed people grew by 47,500, while the number of unemployed people declined by 10,500. The participation rate remained at a record high of 67.1%, and the employment-to-population ratio increased slightly to 64.3%. Despite the steady unemployment rate, the labour market remains tight, with a high number of job vacancies and people entering the workforce. Unemployment will likely increase consumption expenditure growth remains weak, while the participation is expected to remain historically high in the short term as households continue to work hard to meet their rising living costs.
The latest data reveals that the economy grew by just 0.2% in the June quarter, marking the slowest pace since the 1990s recession, excluding the pandemic period. Household consumption has been particularly weak, with a 0.2% decline in the June quarter, the largest drop outside of the COVID-19 period since the global financial crisis. High inflation and interest rates continue to exert pressure on consumers, leading to reduced discretionary spending. Additionally, a record number of small businesses entered insolvency last financial year, particularly in the construction and hospitality sectors. Despite these challenges, there are some positive developments, such as the potential creation of over 4,300 jobs through domestic wind tower manufacturing and the anticipated lifting of China’s ban on Australian lobster imports.
US Economy
The US labour market has been experiencing mixed signals recently. On one hand, the number of jobless claims has surged to 258,000, the highest in over a year, partly due to factors like recent hurricanes1. On the other hand, the September jobs report showed a surprising addition of 254,000 jobs, with the unemployment rate falling to 4.1%. However, there are concerns about the sustainability of this growth, as inflation data and other economic indicators suggest potential challenges ahead.
Overall core inflation is approaching the Federal Reserve’s 2% target on a three-month annualised basis due to several dynamics. Tight policy has put loosening pressure on the labour market, leading to softer core services prices. Though housing continues to run at an above-target pace, it has moderated substantially this year, with leading indicators pointing to further improvements. Global growth has softened, with Europe expanding around 0.5% year-over-year and China posting its weakest growth since the 1990s (excluding the Covid-era lockdown). While geopolitical concerns remain a risk, they have not escalated in recent months, allowing global shipping prices to quietly drop around 40% from their December peak.
With growth softening, inflation approaching target, and recession risks rising, it makes sense that the Federal Reserve started cutting interest rates. However, markets may be too optimistic about future rate cuts, even after the strong 50 basis points cut to start the cycle. Fed officials have indicated a preference to move steadily, likely cutting 25 basis points per meeting while retaining the flexibility to accelerate or pause cuts. This approach allows time to gauge the impact of rate cuts as the central bank moves toward a neutral policy stance of around 3.25% to 3.50%. The Fed is expected to eventually get back to that level by mid-next year.
Fiscal Policy and Global Debt
Fiscal deficits are rising around the world, posing a medium-term challenge that may eventually capture market and policymaker attention. Many countries are in a challenging fiscal position, running very large government deficits with big public debt loads often above 100% of GDP. To stabilize the U.S. public debt load, for example, would require reducing the deficit by about 4% to 5% of GDP, which would theoretically slow the economy by about a percentage point over four to five years. This fiscal excess is likely to catch up to some countries, potentially leading to more sluggish growth in the second half of the 2020s as these issues are addressed.
European Economic Growth
In Europe, inflation has declined, allowing the European Central Bank and the Bank of England to reduce rates, taking some pressure off the economy. However, the region's growth prospects remain varied. Mediterranean countries like Greece are moving more quickly, while Germany struggles with demand for its sophisticated manufacturing goods and competition in the auto sector. The UK, after a challenging 2023, is showing signs of recovery with better job numbers and reviving purchasing manager indices. On aggregate, Europe is positioned to grow, but at varying rates depending on the country.
Chinese Economic Growth
China's economy has slowed, particularly in the housing market, which remains a laggard. While policymakers are likely to prevent any severe downturns, the sector is not expected to be a source of strength soon. The consumer sector, expected to drive growth, has not fully met expectations, with modest increases in retail sales. Traditional drivers like exports and industrial production remain strong, but overall growth is expected to be around 5% this year.
Investment outlook
Manager’s that SQM Research reviews are cautiously optimistic with many expecting a soft landing where recession is avoided. Value is seen in Emerging market particularly China while the recent surge driven by announce stimulus will have tapered that enthusiasm it is likely to remain attractive. Private Credit managers continue to show resilience despite the challenges seen with business insolvencies. It appears that arrears and defaults rising but not alarmingly so. Corporate earnings growth has slowed and is likely to see lower growth in the near term which will drive unemployment higher. This is likely to impact equity markets which have recently risen to all-time highs. However, without a recession any pull back in markets are unlikely to be overly concerning and the forward view would be positive.
