August 2024 Economic Review

Inflation in the US dropped below 3% in July, getting closer to the US Federal Reserve (US Fed)’s 2% target, while the unemployment rate rose. The UK economy grew in the first and second quarters of 2024, after declining in the third and fourth quarters of 2023. The Bank of England (BoE) cut rates in August for the first time since the Covid pandemic. The Reserve Bank of New Zealand (RBNZ) also cut rates for the first time in over four years. South Africa’s real interest rate reached the highest level in 18 years, which may persuade the South African Reserve Bank (SARB) to lower rates in September.

US inflation falls to 2.9% in July

Consumer prices in the US rose moderately in July and the annual increase in inflation slowed to its lowest rate since the Covid pandemic. This appears to signal that the US economy is finally cooling and increases the prospect of rate cuts by the US Fed. CPI was 2.9% year-on-year (y/y) in July, down from 3% y/y in June. This is the first time the index has dipped beneath 3% since March 2021. The CPI figure was in line with market expectations. According to the Bureau of Labour Statistics, a 0.4% increase in shelter costs (including rents) accounted for nearly 90% of the rise in the CPI. Shelter costs increased 0.2% in June. Food prices gained 0.2%, matching June’s rise. Fuel prices were unchanged after falling for two straight months.

Source: Bureau of Labour Statistics, LSEG

Annual price increases for many items have already slowed below the US Fed’s overall 2% target, with some prices declining as companies slash prices and offer discounts to lure customers to spend. The latest inflation reading adds to growing signs that the swift price increases consumers have suffered since the pandemic are decreasing, raising the question whether the US Fed will cut interest rates at the September meeting. It is likely that a cooling labour market has been weighing on consumers more recently, though.

UK economy continues recovery with 0.6% growth

The UK’s Gross Domestic Product (GDP) – a key measure of all the economic activity of companies, governments and people – grew by 0.6% between April and June as it continued its recovery from the recession at the end of 2023. The latest figure was in line with forecasts and follows a 0.7% increase in the first three months of 2024. The growth in the country’s GDP can be attributed to the services sector, in particular the IT, legal services and scientific research industries. Services are the biggest contributor to the UK’s economy, far outstripping manufacturing and construction, both of which saw output fall between April and June.

Source: Office for National Statistics, August 2024

The Office for National Statistics said the UK economy has now grown strongly for two quarters, following the weakness seen in the second half of 2023 when there was a shallow and short-lived recession. Although GDP expanded in the second quarter of 2024, growth was flat in June. The services sector buoyed economic expansion over the three months but was a drag on performance in June. In August the BoE cut interest rates by 25 basis points to 5%. This was its first cut in the four years since the pandemic and brought the key rate down from a 16-year high of 5.25%. Inflation rose to 2.2% y/y in July, which was above the BoE’s 2% inflation target. However, services inflation – which the BoE also considers when deciding on interest rates – continued to ease.

For your interest:

1. New Zealand delivers first rate cut in over four years and flags more easing

• The RBNZ lowered its benchmark rate by 25 basis points to 5.25%. This is the first rate cut since March 2020. The bank signalled more cuts in the coming months due to inflation nearing its 1% to 3% target. The decision surprised markets, as most economists expected rates to remain steady.
• New Zealand’s central bank Governor, Adrian Orr, raised the possibility of cutting rates by an additional 50 basis points by year-end. Orr expressed confidence in New Zealand’s return to an environment of low and stable inflation.

2. China’s rising youth unemployment breeds new working class

• Rising unemployment in China has created a challenging situation for millions of college graduates. Some graduates are forced to accept low-paying jobs or rely on their parents’ pensions, creating a new working class known as “rotten-tail kids”.
• Post-graduates also struggle to secure employment in the current bleak economy. President Xi Jinping emphasised the importance of finding jobs for young people, but the situation remains difficult.

3. Sharp slowdown in US job growth boosts unemployment rate to 4.3%

• The US unemployment rate rose to 4.3% in July, marking the highest level since October 2021. This increase came amid a significant slowdown in hiring, raising concerns about the labour market’s health and its vulnerability to a recession.
• In July 2024, the US economy added only 114 000 jobs, well below the 215 000 jobs per month needed to keep pace with population growth. The recent surge in immigration has contributed to this demand for labour. Health care, construction, and transportation sectors contributed to job gains. Top of FormBottom of Form

4. South African women hit hard by unemployment and inequality

• According to a Stats SA survey, South African women face significant challenges related to unemployment and workforce inequality. Over the past decade (2014–2024), fewer women have participated in the labour market than men. However, there were notable increases in labour force participation by women with less than a matric qualification and graduates.
• Men consistently reported higher absorption rates (the proportion of employed individuals) than women. The gap between absorption and labour force participation rates has widened for both genders, indicating that a larger proportion of those entering the labour market are facing unemployment.

South Africa’s inflation and September rate cut expectation

South Africa’s real interest rate reached the highest level in 18 years. This means that the South African Reserve Bank (SARB) may consider lowering borrowing costs by 50 basis points at least once this year. The spread between the SARB’s policy benchmark rate and the annual inflation rate widened to 365 basis points in July. Consumer price growth was at 4.6%, the lowest in three years. This gap is the largest since May 2006 when the SARB began an aggressive hiking cycle.

Source: SARB, Stats SA

Lower borrowing costs could ease strain on households, boost consumer confidence, and support economic growth. The SARB aims to stabilise inflation and anchor price growth expectations within its 3-6% target range. SARB Governor Lesetja Kganyago has emphasised that rate cuts will be considered when inflation eases sustainably toward 4.5%. Inflation dropped to 4.6% y/y in July from 5.1% y/y in June. Bloomberg Economics suggests that a firmer rand and falling fuel prices are bringing annual inflation closer to the central bank’s target, potentially kickstarting a rate-cutting cycle in September.

Macro overview

Global overview

Global equities started the month in negative territory, but then bounced back strongly. The MSCI World Index delivered a positive return at 2.64% month-on-month (m/m) in dollar terms. Weak US jobs data was the driver for risk aversion early in August. The US unemployment rate unexpectedly jumped to 4.3%, leaving it 0.5% higher over three months. Another source of risk-aversion came from the Japanese central bank, which unexpectedly hiked rates and announced plans to slow quantitative easing. Emerging markets (EMs) also posted positive gains for the month, with the MSCI EM Index ending at 1.65% in dollars. Global bonds and global property continued the gains seen in the previous month. In August, they appreciated by 2.37% m/m and 6.31% m/m respectively (in dollars). The FTSE Index and the S&P 500 were also both in positive territory at 0.45% m/m in pounds and 2.43% in dollars. The Dow Jones ended the month positively at 2.03% in dollars, the Euro Stoxx 50 was positive at 1.80% m/m, and the Nikkei was negative at -1.09% m/m.

Local overview

South African equities continued their strong post-election run, with the FTSE/JSE All Share Index posting gains of a 1.38% m/m in rand terms. Industrials gained 2.98% for the month and Resources ended negatively at -10.14% m/m. Property and Financials were both positive at 8.25% m/m and 5.39% m/m respectively. Cash was also in positive territory for the month at 0.69%. The bond market was positive, as the FTSE/JSE All Bond Index gained 2.38% in rands. Bonds of 1-3 years gained 0.99% m/m, bonds of 3-7 years gained 1.72% m/m, bonds of 7-12 years gained 2.47% m/m, and bonds of 12 years and above gained 3.14% m/m. The rand strengthened against the US dollar, euro and pound by 2.46% m/m, 0.16% m/m and 0.13% m/m respectively, but weakened against the Japanese yen by -3.23% m/m.