July 2024 Economic Review

July 2024 Economic Review

China continued to experience economic hardship in the first half of 2024, but the economy is still growing. GDP rose in Q2 2024, although not at the targeted pace. China’s consumer price inflation (CPI) increased in June, while producer price deflation persisted. US inflation fell in June but has still not reached the US Federal Reserve (Fed)’s target. China made a surprising interest rate cut in July, Canada cut rates for the second time, and the European Central Bank (ECB) left rates unchanged. The South African Reserve Bank (SARB) held interest rates unchanged in July. A rate cut is anticipated if inflation remains steady.

China’s economy grows below expectations in June

China’s National Bureau of Statistics reported the country’s Q2 2024 GDP rose by 4.7% year-on-year (y/y), missing expectations of a 5.1% y/y growth. According to a Reuters poll, June retail sales also missed estimates, rising by 2% y/y compared with the 3.3% y/y growth forecast. However, industrial production growth in June beat expectations at 5.3% y/y, compared with Reuters’ estimate of 5%. High-tech manufacturing saw an 8.8% increase in value added in June. Oxford Economics forecasts China’s 2024 GDP growth will be at 4.8%, higher than the 4.4% it estimated in December 2023.

Source: LSEG Datastream, Reuters, July 2024

China’s urban fixed asset investment for the first half of the year rose by 3.9%, meeting market expectations. Investment in infrastructure and manufacturing slowed on a year-to-date (YTD) basis in June compared with May, while real estate investment declined at the same 10.1% rate. Housing-related wealth in China rose by 2.2% in 2023, down sharply from the 13% average annual pace between 2016 and 2021. The Bureau of Statistics said the Chinese government must work harder to stimulate the market and internal impetus. They also called for efforts to consolidate and enhance the momentum for economic recovery and growth to ensure sustained and sound development. Moreover, the Bureau of Statistics said China’s urban unemployment rate in June was unchanged from the prior month at 5%.

China’s June consumer inflation misses forecasts

China’s consumer prices rose for the fifth month in June but missed expectations, while producer price deflation persisted. Domestic demand is recovering slowly, despite support measures. Beijing sought to revive consumption after a stuttering post-Covid recovery, but concerns are lingering over more fundamental issues, including a property crisis, slowing growth and income, and job insecurity amongst others. Those issues have dented consumer and industrial activity and intensified calls for more effective policies.

Source: Bureaus of Statistics, Reuters, July 2024

Domestic demand remains weak in China and the risk of deflation persists. The country’s CPI edged down by 0.2% month-on-month (m/m), versus a 0.1% m/m drop in May, and it was worse than expectations for a 0.1% fall. This is the slowest growth in three months. Data from the National Bureau of Statistics showed that the figure was below the 0.4% increase forecast in a Reuters poll. The producer price index (PPI) fell by 0.8% in June from a year earlier, less than a 1.4% decline the previous month, and was in line with expectations.

Food prices fell even faster, despite supply disruptions caused by bad summer weather, underlining soft demand. Food prices slipped by 2.1% y/y, compared with a 2% y/y decline in May. Notably, fresh vegetable prices tumbled by 7.3% y/y against a 2.3% y/y rise in May. A decline in fresh fruit prices deepened to 8.7% y/y from 6.7% y/y in May.

US inflation rate drops to 3%

US inflation fell faster than expected in June, to 3% y/y, the lowest level since June 2023. This prompted investors to strengthen bets on interest rate cuts and pushed Treasury yields down. In an encouraging sign for the US Fed as it discusses how soon to reduce interest rates from their 23-year high, the y/y growth in consumer prices was below May’s rate of 3.3%. Bloomberg economists had predicted an inflation rate of 3.1%. The dollar lost 0.6% against a basket of currencies following the release of the Bureau of Labour Statistics’ data. Treasury yields fell as traders upped their bets on two interest rate cuts this year, while President Joe Biden said the results indicated the US was “making significant progress in fighting inflation”. According to LSEG statistics, the likelihood of a September cut increased to 100% following the CPI report, from 72% previously.

Although general inflation is returning to more normal levels, one crucial component of the CPI remains significantly elevated: shelter. Americans paid 5.2% more for rent and monthly homeowner payments last month than they did in June 2023, with the CPI’s shelter subindex rising by an astonishing 26% during the previous five years. Annual shelter inflation is substantially more than it was even at the height of the 2000s housing market boom. Drastically higher mortgage rates (up from around 3% to 7% in the previous three years), still high price tags, and a congested rental market have all contributed to higher shelter costs.

Source: Financial Times and Forbes, July 2024

For your interest:

1. Bank of Canada cuts interest rates again, signals more to come

• Although price pressures in shelter and services are keeping inflation high, the Bank of Canada lowered its interest rate to 4.5% in July, pointing to the decline in household spending on housing and consumer goods. This marked the bank’s second consecutive rate cut of 25 basis points (bps).
• When the Bank of Canada makes its next monetary policy decision on 4 September 2024, money markets are factoring in a 53% chance that it will lower rates again. They are factoring in just one more 25 bps cut this year, which would bring the policy rate down to 4.25% by the end of the year.

(Source: Financial Post, July 2024)

2. ECB keeps interest rates unchanged

• As expected, the ECB held interest rates steady in July and offered no clues as to what it would do next. Its rationale was that domestic price pressures would persist, and inflation would remain above target long into the coming year.
• The ECB reduced interest rates in June from all-time highs, a decision that even some of its policymakers regarded as hasty, given stalled efforts to bring inflation down to the 2% target. The bank will probably hesitate to take further action because wage growth is still unrelenting and domestic inflation is persistently high.

(Source: Business Standard, July 2024)

3. China cuts short- and long-term rates to boost economy

• China surprised markets by cutting major short- and long-term interest rates in July, its first such move since August last year. This signalled government’s plans to boost growth in the world’s second-largest economy, just days after a Communist Party leadership meeting.
• The cuts to the central bank’s key short-term policy rate, its market operations rates and benchmark bank lending rates, came after China reported weaker-than-expected second-quarter economic data in July and its top leaders met for a plenum that occurs roughly every five years.

(Source: Reuters, July 2024)

South Africa pauses interest rates, with possibility of a cut

The SARB maintained interest rates at 8.25% at its July Monetary Policy Committee (MPC) meetings. Four members voted for a pause and two voted for a 25-bps cut. The hiking cycle has been paused since May 2024, with the SARB stating that it will only decrease rates once inflation has fallen convincingly. The MPC’s efforts have mostly paid off, with the latest inflation rate for June 2024 coming in at 5.1% from 5.2% in May 2024.

Although this figure is within the SARB’s 3% to 6% target range, SARB Governor Lesetja Kganyago has stated that he would prefer to see inflation hover around the midpoint target of 4.5%. This would motivate the SARB to consider lowering interest rates and improve SA’s economic outlook. MPC members agreed that tight policy remains necessary to keep inflation around the midpoint of the target.

Given the inflation risks, the committee determined that maintaining an unchanged stance was appropriate. While South Africa’s inflation outlook has improved, the balance of risks is skewed to the positive. Global interest rates remain high, particularly in the US, posing concerns to the currency outlook. Services inflation is very high, and electricity inflation has been marked up.

Macro overview

Global overview

Global equities continued their march higher at the start of the second half of 2024. The MSCI World Index ended positively at 1.76% m/m in dollar terms. The Magnificent 7 were collectively responsible for half of the MSCI World Index’s return in the first half of 2024. Emerging markets (EMs) gained for the month with the MSCI EM Index ending at 0.37% in dollars. Global bonds and global property gained 2.76% m/m and 6.07% m/m respectively in dollars.

The FTSE Index and the S&P 500 were also both in positive territory at 3.13% m/m in pounds and 1.22% in dollars. The Dow Jones ended the month positively at 4.51% in dollars, the Euro Stoxx 50 was negative at -0.30% m/m, and the Nikkei was negative at -1.21% m/m.

Local overview

For the second consecutive month, South African equities were one of the top-performing major emerging markets in July, when the FTSE/JSE All Share Index was up 3.92% m/m in rands. The momentum from post-election optimism since the GNU and cabinet announcements carried into July. Industrials gained 1.65% for the month, with Resources positive at 5.53% m/m, Property positive at 4.39% m/m, and Financials positive at 5.39% m/m.

Cash was also in positive territory for the month at 0.70%. The bond market was positive for the month, as the FTSE/JSE All Bond Index gained 3.96%. Bonds of 1-3 years gained 1.59% m/m, bonds of 3-7 years gained 3.41% m/m, bonds of 7-12 years gained 4.07% m/m, and bonds of 12 years and above gained 5.06% m/m. The rand strengthened by 0.38% m/m against the US dollar, but weakened against the euro, pound and the Japanese yen at -0.58% m/m, -1.21% m/m and -0.49% respectively.