09
September
2024
What happened over the summer
With the holidays drawing to a close we have been taking stock of economic developments this summer.
- The latest forecasts from the International Monetary Fund, published in July, are reassuring, showing the global economy in a holding pattern with year-on-year growth running around the 3.0% mark seen last year. The IMF’s forecasts assume this ‘steady as she goes’ pattern of activity will continue through 2025.
- This apparently serene characterisation of the state of the global economy belies the more messy and turbulent reality revealed by events over the summer.
- Global equity markets went into a brief meltdown in early August with the Japanese market down a remarkable 23% from its July high. The damage in the US was on a lesser scale, but material, with the US S&P 500 having its worst day since 2022. The panic was motivated by worries about the US falling into recession and reinforced by a sharp sell-off in semiconductor stocks as investors cooled on prospects for AI.
- Those worries eased through August and early September and US equities largely made up their earlier losses. The latest data show that the US economy was in rude health in the second quarter, with GDP growing by a strong 0.7%. But recession fears will not go away, resurfacing last week on the back of data showing much weaker than expected levels of job vacancies and new job creation.
- The biggest risk to an American soft landing comes from a weakening in consumer spending triggered by rising unemployment. Over the summer a raft of consumer-facing companies, including Disney, Hilton Hotels, Airbnb and Proctor & Gamble have reported a slowing of US consumer demand. The question is whether this slowdown will turn into something much worse. Lower US interest rates would help reduce the risk of a hard landing. With wage and inflation pressures easing faster than expected over the summer, the Fed is likely to move quickly, cutting rates at their meeting next week, possibly by as much as 50bp. Markets expect further rate reductions in November and December, by a total of 100bp. The uncertainties are real, but we think this looks like a soft landing, with the US growth slowing, not collapsing, over the coming 18 months.
- Any ups and downs seen in US equities over the summer are nothing compared to the shifts in US political fortunes. Donald Trump’s 3.0% lead in the average of national polls in late June has swung to a 1.9% lead for Kamala Harris. The Economist’s model, based on national polls and economic indicators, places a marginally greater chance of the Democrats securing the presidency. Betting on the outcome of the presidential election is not legal in the States, but non-US betting markets show Trump marginally ahead of Harris among punters. The vote, on 5 November, will hinge on the outcomes in a handful of swing states and is likely to be close.
- The UK economy has performed a Lazurus-like recovery, going from recession in the second half of last year to being the fastest-growing economy in the G7 in the first half of this year. So far this looks like a textbook recovery, with little sign of excess in the consumer sector that has often bedevilled previous recoveries. The momentum has held up over the summer. The latest Deloitte CFO survey, conducted in the immediate aftermath of July’s general election, showed a sharp drop in perceptions of external risk and rising levels of confidence and risk appetite. The pace of activity picked up in July and August, according to the purchasing managers’ index, pointing to a continuation of the recovery into the third quarter. Inflation dropped to just 2.2% in July and, as importantly, underlying or core inflation and wage growth eased, helping pave the way for the Bank of England to cut interest rates in August.
- Despite the good economic news, the new Labour government has struck a sombre tone on the economy. Over the summer the government warned of a £22bn ‘black hole’ in public finances, with the prime minister saying the budget on 30 October would be “painful”. Mr Starmer said that those with the broadest shoulders should bear the heaviest burden, fuelling speculation that tax increases will exceed the £9bn of tax rises in Labour’s manifesto. In a foretaste of the decisions that may lie ahead, the government announced that it plans to end winter fuel payments for the 10m pensioners who are not on means-tested benefits, a measure that will save £1.4bn this financial year.
- It would not be out of character for a newly elected government in the UK to raise taxes. The Economist estimates that since 1978 British governments have increased taxes by an average of 0.5% of GDP, equivalent to £14bn today, in their first year in office. In the 1979 general election the Conservatives denied Labour claims that it planned to raise VAT. In his first budget, just five weeks after the Conservatives had won a landslide victory, the new Conservative chancellor of the exchequer, Sir Geoffrey Howe, raised the main rate of VAT from 8% to 15% (he also, however, cut rates of income tax).
- The new government has offered an above-inflation pay increase to train drivers and doctors with backdated increases for some previous years. In late July the chancellor announced that most NHS workers, teachers, civil servants and members of the armed forces will receive above-inflation pay rises of 5.0% to 6.0%. Pay settlements in the private sector currently average 4.5%. Over the summer a Gallup poll found that dissatisfaction with the education system and the NHS is at the lowest level since data started to be collected in 2007.
- The EU is seeing a weaker recovery than in the UK. Germany remains in the doldrums, and its economy contracted in the second quarter. German business sentiment deteriorated over the summer, leading the IFO Institute to warn that Germany is “stuck in a crisis”. France and Italy are doing rather better, but Spain is the real outlier, with tourism driving faster growth than in the US or the UK in the second quarter.
- Inflation in the euro area eased to 2.2%, prompting the ECB to cut rates by 0.25bp in June. The general expectation is that the ECB will reduce rates again at their next meeting this week.
- Britain’s election of a Labour government in July was the political exception in a Europe that seems to be drifting right. Emmanuel Macron called a snap election in France shortly after his Ensemble alliance suffered defeat in the European elections to Marine Le Pen’s National Rally. After strong initial polling for the National Rally, the final result saw them place third. Last week President Macron appointed the centre-right Michel Barnier, the EU’s former Brexit negotiator. Mr Barnier faces the daunting task of trying to stabilise France’s public finances, balancing domestic opposition to austerity against pressure from the EU Commission and the bond market to reduce the deficit.
- In early July a new coalition government was formed in the Netherlands which includes Geert Wilders' anti-immigration, far-right PVV as the largest party. Mr Wilders has had to dilute some of his key policies to form the coalition but, as the leader of the largest party within the coalition, is likely to remain influential.
- Earlier this month the anti-immigration AfD party won the largest share of votes in the German state election of Thuringia (32.8%), albeit not enough to govern alone. Chancellor Olaf Scholz has called for his centrist CDU party to create a coalition with left-wing parties to prevent the AfD from forming a state government. Germany’s federal election takes place in September 2025.
- China faces a series of economic challenges and is growing only slowly. Excess industrial capacity, falling house prices, weakness in the banking system, deflation fears and the hangover from the pandemic are weighing on activity. Over the summer Chinese consumer confidence continued to run at COVID-era lows. Foreign investors have cooled on China and in the second quarter foreign investment into China dropped to an all-time low. It’s hard to gauge the exact pace of growth in China – as the Economist observed this week, “the government is widely believed to be massaging data [and] suppressing sensitive facts” – but foreign economists have been trimming their forecasts for Chinese GDP growth.
- Weakness in the Chinese economy is feeding back into the rest of the world, dampening demand for imports and for commodities. Iron ore and copper prices fell over the summer and the oil price is running 20% lower than a year ago. Manufacturing production is weak across the world, but especially in Germany.
- The global auto sector faces particular challenges. Consumers demand is sluggish with many consumers cautious about ‘big ticket’ purchases. Demand for electric vehicles has softened in Europe, mainly because of weakness in Germany. This has fed through to manufacturers, with Ford, GM and Mercedes scaling back their electric vehicle plans and Volvo scrapping its target to only sell EVs by 2020. Over the summer carmakers Stellantis, Ford, Tesla and Nissan announced lower-than-expected results while VW said it is considering closing two of its German factories.
- So how can one sum up the state of the global economy? The good news is that inflation has continued to abate and interest rates in the West are on a downward trend. The world economy is growing at a steady pace and is likely to do so through next year. But the picture varies across countries: the US economy is cooling, slowly, a weak recovery is coming through in Europe, with Germany stagnating and the UK outperforming and China faces a series of headwinds. Worries about whether the US can achieve a soft landing, and about China’s economic prospects, are likely to remain to the fore.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 2.3% at 8,181 as stock markets around the world fell following a number of soft data releases in the US.
Economics
- Job creation slowed in the US in July and levels of job vacancies fell
- The Fed’s regular survey of business conditions, The Beige Book, reported flat or declining activity in three-quarters of Fed regions and suggested employers are becoming more selective with hiring
- The S&P 500 stock market index fell 4.2% last week on renewed concerns about a US ‘hard landing’
- Technology stocks saw some of the largest sell-offs – the Nasdaq, containing a large number of tech companies, fell 5.4% last week
- The Bank of Canada cut interest rates by 25bp to 4.25%, in response to “continued easing in broad inflationary pressures” and a slowing labour market. Further cuts are expected in October
- UK house prices rose by 4.3% in the year to August, the highest growth rate since November 2022, according to Halifax
- Apartment prices in the UK have risen half as fast as other property types, according to the FT
- German manufacturing activity, as measured by surveys of purchasing managers, declined at its fastest pace in five months and industrial output fell by 2.4% in July
- Euro area quarterly GDP growth was revised down in Q2 from 0.3% to 0.2%
- The ECB is expected to cut interest rates by 0.25 percentage points when it meets on Thursday
- Former Chinese central bank governor Yi Gang said that China “should focus on fighting deflationary pressure” in the wake of weak domestic demand
Business
- UK pension schemes hold considerably fewer domestic equities than the global average, adding to concerns over the vitality of the London market, according to a study from think-tank New Financial
- The UK’s Competition and Markets Authority issued a provisional finding that Google used anti-competitive advertising practices to favour its own services
- Despite US export restrictions, Chinese cloud services using AI-optimised Nvidia semiconductors were cheaper than US services, according to the FT
- *A $38bn takeover bid by Canadian Alimentation Couche-Tard for convenience store 7-Eleven has been rejected by current owner Seven & i Holdings, citing the offer as a “gross” undervaluation
- South Korea will require all EV manufacturers to name battery suppliers in response to public concern over an EV fire last month
- The German government will acquire 40% of shipbuilder Meyer Werft after financial difficulties
- The Grenfell Tower Inquiry heavily criticised failings by the government, regulators and the construction industry in its final report
Global and political developments
- Kamala Harris and Donald Trump's first televised debate will take place on Tuesday
- US Democratic candidate Kamala Harris raised $316m in August, eclipsing the $130m raised by Republican candidate Donald Trump
- Russian president Vladimir Putin visited Mongolia despite an arrest warrant by the International Criminal Court, of which Mongolia is a member
- The US has imposed export controls on semiconductor and quantum manufacturing goods, citing ‘national security and foreign policy reasons’
- The UK suspended 30 of 350 arms export licenses to Israel saying that there was a “clear risk” they might be used in violations of international humanitarian law
- Sir Keir Starmer said his government is “going to have to be unpopular” as he defended the decision to end winter fuel payments for 10m pensioners
- Robert Jenrick topped a poll of MPs in the first round of the Conservative Party leadership contest; former home secretary Priti Patel was eliminated
- Chinese president Xi Jinping pledged $50bn to African nations over a three-year period at a three-day forum on Sino-African cooperation attended by over 50 African leaders
And finally… last week four bowlers in Louisville, Kentucky, attempted to inaugurate a Guinness world record for the most 10-pin bowling strikes in a 24-hour period. The foursome scored a total of 2,032 strikes, surpassing the 1,200 strikes required within just 15 hours - time to spare