Recent economic data in the US support our view that growth is easing but remains healthy, and the jobs market is cooling rather than cracking.
While data from the euro area and UK suggest varying degrees of economic health, the slowdown in China suggests more robust action may be required to revive the country’s flagging economic activity.
United States
The Federal Reserve (Fed), the US central bank, had a strong start to its interest rate-cutting cycle back in September, cutting rates by 0.5 percentage points. We expect further cuts of 0.25 percentage points in November and December.
Recent revisions to key economic data suggest a firmer picture of overall growth and consumer health than initial readings indicated in September. We still expect official readings for third-quarter economic growth to come in below recent Fed estimates of 3.2%. We foresee full-year growth to be above 2%.
Inflation slowed to 2.4% for the 12 months to September, down from 2.5% in August. The reading was above expectations, driven by the biggest jump in services prices since March.
The latest jobs data exceeded expectations and the unemployment rate fell from 4.2% to 4.1% in September. We believe that talk of job market deterioration in recent months has been exaggerated.
Euro area
Growth in the euro area is slowing sharply, with Germany on the cusp of recession. Elevated services inflation (the prices that consumers pay for services) underscores our long-held view that the last mile to lowering inflation is the most difficult.
The European Central Bank (ECB) cut interest rates by 0.25 percentage points this month, following cuts in both June and September. We foresee another cut in December, which would leave interest rates at 3% by year-end. We expect rates to be cut to 2%-2.5% by mid-2025.
Recent data suggest that economic growth slowed in the third quarter, driven by a continued slump in manufacturing. This is after the economy grew by just 0.2% in the second quarter compared with the first. We have lowered our full-year growth forecast for 2024 from 0.8% to 0.6%.
Inflation fell to 1.7% in the 12 months to September, down from 2.2% in August. A sharp 6.1% decrease in energy prices drove the decline. Core inflation, which excludes volatile items such as food, energy, alcohol and tobacco, slowed marginally for the second straight month, to 2.7%. We expect core inflation to fall to around 2.5% by year-end, before reaching the ECB’s 2% target in 2025.
The unemployment rate remained at a record low of 6.4% in August. We expect the unemployment rate to end 2024 around current levels.
United Kingdom
In the UK, comments by Bank of England (BoE) governor Andrew Bailey suggested that additional rate cuts could be on the cards this year.
We now expect the BoE to cut rates by 0.25 percentage points in both November and December, with rates ending the year at 4.5%. We maintain our forecast for further rate cuts totalling 1 percentage point in 2025.
Revised economic data for the second quarter showed growth was not quite as strong as originally reported. The economy grew by 0.5% in the second quarter compared with the first, compared to initial estimates of 0.6%. We have lowered our 2024 growth forecast to 1% from our previous forecast of 1.2%.
The UK’s Autumn Budget is scheduled for 30 October. While much remains uncertain, we’re watching for measures that could boost long-term economic growth – and productivity – primarily through greater public and private investment.
Inflation slowed to 1.7% in the 12 months to September, down from 2.2% in August. Core inflation also slowed to 3.2% from 3.6% in August. We expect core inflation to end the year around 2.8% and to hit the BoE’s 2% target by the second half of 2025.
Wage growth continued to cool in the three months to August, while the unemployment rate fell from 4.1% to 4%.
China
In October, China’s Ministry of Finance said that support for the economy, sufficient to ensure China hits its 2024 growth target of 5%, is forthcoming. More specific details are expected to be provided later in the month.
The economy grew by 4.7% in the second quarter compared with the same period last year, but weaker-than-expected retail sales and industrial production figures suggest that growth is slowing.
Inflation slowed to 0.4% in the 12 months to September, mostly driven by a rise in food prices. Core inflation was just 0.1%, down from 0.3% in August. We expect headline inflation of 0.8% and core inflation of just 1.0% for all of 2024.
The unemployment rate rose to 5.3% in August as new graduates joined the jobs market. We expect the unemployment rate to remain around current levels for the rest of the year.
The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as at 16 October 2024.
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