Global Economic Overview – July 2024

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• Global

  The IMF has published its latest take on the world economic outlook, in its usual semi-annual interim WEO update. Little has changed since April’s fuller update: its world GDP growth forecast is unchanged at 3.2% for this year and only 0.1%pt higher for next year than in April, at 3.3%. Our own forecasts are not much different from this. In aggregate, we expect world growth of 3.2% both this year and next. Within that, we have made some minor tweaks to our country GDP forecasts, now seeing slightly softer growth in the Eurozone and in China than last month but faster growth in the UK (Chart 1). Increased use of Artificial Intelligence (AI) may present upside risks, but its adoption and impact are naturally highly uncertain.

  Chart 1: Global growth forecasts are little changed, in aggregate

  

  The bars represent the IMF WEO forecasts from April and July respectively. The lines are Investec forecasts for the last five months.                                                                            

  Source: IMF, Macrobond, Investec Economics  

   

  Also worth noting is that the IMF lifted its 2024 non-fuel commodity price inflation forecast by 4.9%pts to +5.0% y/y. By the standards of the wild swings of recent years this is not much. But it fits with wider worries that climate change may make food price rises more systematic. Heatwaves and flooding are harming crop yields in some major agricultural regions and finding their way into persistent upward pressure on consumer prices in major advanced economies too: for instance, the Energy and Climate Intelligence think tank estimated that more of the cumulative 2022/23 food price rise in the UK was owed to climate change than to energy prices (Chart 2). Central banks may need to factor this into their projections, keeping rates higher than they would otherwise be. 

  Chart 2: Over 2022 and 2023, climate change added more to UK food bills than energy.

  

  Source: Energy & Climate Intelligence Unit, Macrobond, Investec Economics 

  There may also be a persistent element to energy price gains. The AI boom is hoped to deliver much faster productivity growth in coming years. Boosting supply potential in this way would be a huge positive, especially as population ageing harms growth prospects for many countries. But AI’s deployment at scale will also entail a big step up in electricity consumption. This, the IEA projects, will contribute to global data centre power usage doubling by 2026, to about as much electricity as used by the whole of Japan. Renewables are forecast to meet the extra electricity demand and chip power efficiency gains may limit AI’s power needs. But grid expansion is costly, and whether, amid decarbonisation in industry and by households, it can keep pace without adding to electricity prices and thus systematically to inflation, is to be seen. 

  Chart 3: Surging data centre use is expected to add to already rising electricity demand

  

  Source: IEA, Macrobond, Investec Economics

  These are both longer-term considerations, and we note that for now, food and energy price inflation is below its long-term average in the US*, the EU20 and the UK. A more pressing near-term inflation concern relates to shipping costs. At the global level, data so far are not ringing alarm bells; there has been a pickup, but a fairly moderate one (Chart 4). Yet when we look at the price of Shanghai Containerized Freight, there has been a big jump. This may well be related to importers of Chinese goods trying to frontload Christmas shipping due to lengthy route diversions, or to avoid coming hikes in tariffs on Chinese goods, to the extent possible. In itself, this will add to goods inflation to a certain extent; and trade wars more generally suggest it is worth not taking for granted that goods price inflation will stay as low as it currently is. 

  Chart 4: Chinese freight costs have jumped substantially; will this lift goods price inflation?

  

  * Except for energy price inflation, which is slightly higher than average
  Source: Macrobond, Investec Economics 

  That said, for many goods, shipping makes up only a minor portion of the final sales price; and in any case, a key downward influence remains as China exports low inflation across the globe, stemming from its own weak economic backdrop. This has the benefit, for those countries buying China’s goods, that downward pressure on manufactured goods prices remains, countering some of the pressure from higher shipping costs. For China, it has resulted in a record trade surplus as imports struggle due to a lack of domestic demand. An overreliance on export growth for economic prosperity is not sustainable though, particularly if driven by a frontloading of demand (as explained above). China has been here before; in 2004 leaders announced their ambition to rebalance the economy away from investment and export-driven growth to domestic consumption. 

  Chart 5: China’s trade balance reaches record high as exports boom but imports struggle

  

  Source: Macrobond, Investec Economics

  Fast forward 20 years and the same concerns over weak domestic demand plague the growth outlook. GDP data for Q2 was soft: growth slowed from 5.3% in Q1 to 4.7% (y/y) amid its ongoing struggle to overcome its property slump, which is contributing to the subdued consumer environment. It was hoped that authorities would respond with targeted household stimulus at the recent Third Plenum*, but that fell short. On the monetary policy side, although the PBoC cut interest rates this week, a 10bp cut is unlikely to make much of a sea change. Considering this, we have downgraded our China forecast for 2024 by 0.2%pts to 4.8%.

  Chart 6: China’s Q2 GDP growth slows making ‘around 5%’ 2024 target more of a challenge

  

  *The Third Plenum is a major meeting of the CCP which often is a forum for key policy announcements.
  Source: Macrobond, Investec Economics 

• United States

  The strength of the US economy has been the success story of the post-Covid world. Despite higher interest rates and challenging external conditions, the economy has grown impressively above trend. But past results do not guarantee future success and the economy looks set to slow from here. There are signs of stress appearing: credit card delinquencies are high, real household disposable income growth is slowing, bankruptcies are starting to rise and as part of a global theme, the manufacturing sector continues to underperform. US data are, on average, now missing expectations, rather than exceeding them. But are these warning sounds loud enough to support a call of a steep downturn incoming, necessitating aggressive easing from the Fed? Although a risk to our forecast, we see this as unlikely.

  Chart 7: The US economy is disappointing relative to expectations
  

  

  Source: Macrobond, Investec Economics
  

  But a lot comes down to how the labour market performs. Here employment figures, such as non-farm payrolls, have been flattered by the rise in immigration, boosting labour supply. Whereas a 100k job gain used to absorb population changes, due to higher immigration this is now closer to 200k, as explained by Fed member Cook. The rise in the unemployment rate, to 4.1% currently, means that the Sahm Rule* could be triggered soon. Moreover there are questions over whether the Census Bureau figures used fully capture the surge in immigration. Other estimates e.g. Congressional Budget Office data (Chart 8), show greater numbers and therefore probably higher unemployment and looser labour market conditions.

  Chart 8: Immigration is boosting labour supply, but this is unlikely to be sustained
  

  

  * Sahm Rule states that if the 3m avg unemployment rate rises by 0.5%pts from its lowest level in previous 12 months, the economy might be in early stages of recession.
  Source: CBO, Investec Economics

  Our base case is that the economy will experience a mild downturn in H2 but avoid recession and post growth of 2.4% this year and 1.6% next. Our forecasts for end-year GDP are slightly below that of the Fed. But for Powell and his team it seems to be all about the inflation numbers. The recent meeting saw a change in the statement, now noting the ‘modest further progress’ made towards the inflation target. Following this, a softer CPI print for June, guided lower by an easing in shelter inflation, resulted in Chair Powell stating the greater confidence the Fed has that inflation is moving to 2% sustainably. He specifically referred to the last three inflation prints (Chart 9). This supports our call for a first policy easing in September.

  Chart 9: Is this what the ‘good’ inflation data that Powell is searching for looks like? We think so
  

  

  Source: Macrobond, Investec Economics

  Monetary policy has been overshadowed by politics in recent weeks, though. Since we published June’s Global, Donald Trump survived an assassination attempt and was confirmed as the Republican nominee, whilst on the Democrat side a string of poor polling and pressure from his party led to President Biden stepping out of the 2024 Presidential election race, endorsing current VP Kamala Harris in his wake. Although polling suggests that the VP has a better chance than her boss to win the election, most polls still place Trump ahead. This comes with two caveats though, one that she is yet to be confirmed as the nominee (this is expected by 1 Aug) and two, the potential polling error is large as the majority of the surveys were conducted before Biden ruled himself out of the race.

  Chart 10: Early days but betting odds for the 2024 Presidential election remain in Trump’s favour

  

  Source: PredictIt, Macrobond, Investec Economics

  The race to the Presidency is not the only important election on 5 November though. The make-up of Congress will determine how easy it is for bills to make it to the President’s desk to be signed into law. As it stands, the Democrats hold the Senate (just!), and the Republicans control the House. Due to the seats that are up for re-election, the Democrats face a difficult path to holding the Senate, particularly considering that Dem. Manchin of West Virgina (a solidly red state) is retiring. The House, where all seats are up for re-election appears a closer race. Given the political uncertainty, we continue to condition our forecasts on unchanged policy, but we have started to consider the impact on our forecasts of various outcomes.

  Chart 11: Polling conducted prior to Biden’s withdrawal suggests House race on a knife-edge
  

  

  Source: The Hill, Macrobond, Investec Economics
  

  A GOP electoral victory is often thought to result in stronger equity markets and a USD rally. Indeed after Donald Trump’s 2016 victory, the dollar climbed for two months while equities enjoyed a near two-year bull run. What a Trump administration would do this time after a Republican clean sweep is not clear, but policies floated so far are cutting taxes; a general tariff hike on imports of 10% pts (those from China by 60%pts); watering down Fed independence; driving down the USD; curbs on immigration; less support for Ukraine and Taiwan; and ramping up fossil fuel extraction. Higher bond yields seem likely in this situation, but it is less clear which way currencies and stocks would move. On election night 2016, markets changed their minds about Trump’s win, with the dollar (and stocks) reversing sharp losses (Chart 12)..

  Chart 12: Early morning 9 Nov 2016 – the USD suddenly changes its mind on Trump’s win
  

  

  Source: Bloomberg, Macrobond, Investec Economics
  

• Eurozone

  At its most recent meeting in July, the ECB’s Governing Council (GC) voted to take a pause in its easing cycle and keep rates on hold, as had been expected. The ECB also kept its rhetoric largely the same, that it remains data-dependent and would not pre-commit to any pre-determined rate path. Indeed at the press conference ECB President Lagarde stated that the September meeting is ‘wide open’. Subsequently members of the GC, including some hawks, have signalled a possible cut in September if incoming data are as they expect. That said, although firmly data dependent, Lagarde did stress that this does not mean that the GC is looking at single data points, for this would leave it unable to see the ‘wood for the trees’.

  Chart 13: The ECB expects wages to remain high this year, but fall steeply thereafter
  

  

  Source: ECB, Macrobond, Investec Economics

  Q1 saw an uptick in some wage data which raised questions about the timing of the ECB’s rate cut in June. However, Lagarde pointed out that due to the structure of wage bargaining in Europe, elevated wage growth was expected this year and already baked into its inflation forecasts. Instead Lagarde emphasised that the ECB’s forward looking wage trackers testify to a deceleration in pay next year to levels compatible with the ECB’s inflation target. We would therefore argue that as long as the ECB’s forecasts continue to show inflation at target in 2025 and 2026, strong wage numbers through this year will not throw the GC off course in easing policy, with our base case a further 50bps of cuts this year and 100bps in 2025.

  Chart 14: This is backed up by the ECB’s forward-looking CTS* wage expectations survey
  

  

  *CTS: Corporate Telephone Survey
  Source: ECB, Macrobond, Investec Economics

  Tighter monetary policy over the last 18 months has clearly had an impact on credit growth, with household and corporate lending stalling (both +0.3% y/y in May). However with the ECB beginning to loosen policy, conditions may be starting to turn. The ECB’s Q2 Bank Lending Survey is one example, with the net percentage of banks reporting tighter credit standards for firms improving to +3%; it had stood at +27% in Q2 2023, its highest reading since the Euro area debt crisis. The news on household lending was more encouraging still, with a net balance (6%) of banks easing lending standards, whilst household demand for mortgage loans turned positive for the first time since Q2 2022. As can be seen in Chart 15, the general level of interest rates was a key factor weighing on demand, a fact which has turned given prospects for lower rates.

  Chart 15: ECB Bank Lending Survey – Factors behind mortgage demand
  

  

  Source: ECB Q2 bank lending survey 2024, Macrobond, Investec Economics
  

  A turn in the credit cycle would certainly help foster an economic recovery via a potential strengthening in investment, the level of which remains 4.5% below its pre-Covid peak. High interest rates and tight financial conditions have been a factor, so has general economic uncertainty. But with rates set to fall and economic prospects brightening we expect an investment recovery, which should support the wider household income driven recovery story. We judge these to be the broad economic trends over the next year. In the meantime though the scale of the weakness in recent industrial production data has led us to make a minor downgrade to Q2 GDP (0.2% q/q). Consequently 2024 GDP is nudged down 0.1%pts to 0.7%.

  Chart 16: Investment has lagged, but easing financing conditions should support a rebound
  

  

  Source: Macrobond, Investec Economics

  Political risks remain a feature of the Euro area with France front and centre. The failure of the far-right RN to secure a majority in National Assembly elections has eased some political worries, a contributing factor to the tightening in the 10y French OAT-Bund spreads (currently 63bps). The Euro has also strengthened to $1.09, but this is largely a dollar driven move.  In our assessment there remain risks around France given the polarisation between the left and the right, which will make selecting a new PM and more importantly passing a new budget in September very difficult. Given the risk of France entering a period of political paralysis, we are cautious over prospects for the euro over the coming months. As such our end-2024 forecast is unchanged at $1.08.

  Chart 17: A polarised National Assembly runs the risk of political paralysis
  

  

  Source: Flourish, Macrobond, Investec Economics

  Political risks aside, a nagging worry is that markets are ‘priced for perfection’ and run the risk of an outsized shock if a downside risk crystallises. A factor highlighted by the ECB in its potential to amplify a shock is the role of non-bank financial intermediaries (NFBIs). EU NFBIs cover a multitude of entities ranging from investment funds to private equity (PE), and are estimated to represent €45trn* of assets. Financial interlinkages are complex but worries centre on issues such as liquidity fragilities at funds. For example, the ECB deems that 15% of ETFs and OEICs are inadequately prepared to deal with ‘plausible’ margin demands, potentially triggering fire sales in a stress. Concerns over PE are also apparent given opacities of valuations, leverage and resilience to high interest rates.

  Chart 18: NBFI assets now represent 41% of all financial assets in the EU
  

  

  # OEIC: Open ended investment company, * European Systemic Risk Board- NBFI monitor June 2024 
  Source: Macrobond, ESRB, Investec Economics

• United Kingdom

  Labour emerged from the recent general election with an overall majority of 172, but as Sinn Fein will not take up its seven seats, Sir Keir Starmer's effective majority should be 181*. The Conservatives ended up with just 121 MPs, the lowest total in their history. But it could have been worse. In terms of vote shares, the Tories finished a relatively modest 10% behind Labour. Over most of the campaign they trailed by 20%-22%, an outturn which, no doubt, would have consigned the number of their seats to double digits. Notably Labour have taken 62% of the seats with just 34% of the vote (Chart 19). And there will be an extra 61 Lib Dems MP (compared with the 2019 election), despite their vote share rising by less than 1%.

  Chart 19: Labour gained a landslide majority with just over a third of the votes
  

  

  7 Labour MPs have already lost the whip, reducing the effective majority to 167
  Source: UK Parliament

  The govt outlined its legislative intentions in the King’s Speech, outlining 40 different bills. On fiscal rules, its election manifesto indicated that they would be similar to the previous government, but we have no further granularity, nor any firm steers on the precise timing of the autumn Budget (though we suspect it may be held in mid-October). Near-term we maintain that some tax rises will take place for protected departments (e.g. health & social care and education) to receive real terms spending increases without cuts elsewhere. But we expect these to be modest and further ahead the government plans to raise trend GDP growth to 2.5% per annum to ease the pressure on the public finances.

  Chart 20: Similar fiscal rules to the Tories, but details not spelt out yet
  

  

  Source: OBR, Labour party, Macrobond, Investec Economics

  Despite likely shifts in tax and spending we expect little change in the overall fiscal stance, with few implications for rates. Here, what continues to matter is the data. CPI inflation was steady at 2.0% in June, but services inflation remained sticky at 5.7%, 0.6%pts above BoE forecasts (Chart 21), likely reinforcing the MPC's angst over 'inflation persistence'. On pay, private sector regular earnings growth remained elevated at 5.6% in May (3m yoy). However the ‘single month’ figure was 4.9% (yoy), suggesting that the outturn for Q2 will be very close to the BoE's projection of 5.1%. We now judge that the MPC will pass on cutting rates in August and wait until September to be able to see two more months of data. This is just a minor tweak to our forecasts and we still expect the Bank rate to fall to 4.75% by end-year and 3.75% by end-2025.

  Chart 21: Inflation persistence? Key metrics compared with BoE projections (June)
  

  

  *Estimate for Q2 based on Investec forecasts
  Source: Macrobond, Bank of England, Investec Economics

  Indeed there is little urgency for the MPC to ease policy as the economy has surprised to the upside recently. GDP growth in Q1 was revised up a touch to a robust +0.7% (q/q), while Q2 looks as if it will notch up another rise of 0.7% after a buoyant monthly increase of 0.4% in May. For 2024 as a whole we have upgraded our GDP forecast to +1.3% from 1.0%, while our 2025 projection is nudged up to 1.9% from 1.8%. We do consider that there is a reasonable chance that the government’s 2.5% growth target is met at some stage, if it is successful in cutting NHS waiting lists (thus increasing the size of the workforce) and raising productivity growth. But at this stage we judge this to represent a realistic upside risk to our forecasts, rather than a base case.

  Chart 22: UK economy’s strong start to 2024 reduces any urgency to bring rates down
  

  

  Source: Macrobond, Investec Economics

  Sterling is no longer rangebound, having briefly broken through $1.30 and 84p versus the euro. Many overseas investors consider UK government policymaking to have been chaotic over the past few years, especially since the 2016 EU referendum, resulting in a degree of aversion towards UK assets. This may diminish over time, if and when the new government demonstrates that its economic plans, such as boosting trend growth and expanding housebuilding, are coherent. Improved sentiment towards ‘UK plc’ could benefit various asset classes, including equities. In the context of FX, we have raised our forecasts for cable to $1.32 and $1.35 for end-2024 and end-2025 (from $1.29 & $1.31) and 82p at both points, (was 84p & 85p).

  Chart 23: Sterling has strengthened over the past month
  

  

  Source: Macrobond, Investec Economics
  

  Recent data show the population of England and Wales rose by 610k last year, its fastest pace in at least 75 years, to 60.9m. This is despite a drop in births to 598k, a 21-year low, which only outstripped the number of deaths by about 4k. Net immigration from outside the UK however was material, at 622k. A comparison with equivalent 2011 data highlights the challenge facing the public finances, namely the ageing population. The proportion of people of non-working to working age i.e. the ‘dependency ratio’, has risen by 3% pts over the period to 56.3%. Also official projections for the UK as a whole show that the number of those 85 and over is set to rise to 2.6m in 15 years from 1.6m now. Against this background it is easy to see why the govt is determined to raise the trend rate of GDP growth to underpin tax revenues.

  Chart 24: An ageing population (England and Wales) highlights the need to raise GDP growth
  

  

  Source: ONS, Macrobond, Investec Economics
  

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