Quarterly Investment Outlook – Q3 2024
The global economy slowed down somewhat in the first half of the year, as rate hikes in the previous months moderated demand. However, growth rates are still mostly positive, without major recessions.
Developed market economies are at a sweet spot: They are growing at a pace fast enough to be well into positive territory, but slow enough to allow central banks to begin cutting rates at some point later in the year. Economic performance diverged across trading blocs. The global slowdown was much shallower than originally anticipated, mostly thanks to the US and China. A combination of high fiscal spending in the US and lower rates in China, contributed to better performance from both the world’s key economies. The EU, conversely slowed down significantly, due to tougher fiscal rules and a German manufacturing recession. The UK followed suit, due to its exposure to Europe, persistent services inflation, a faster rate transmission mechanism and sensitivity to higher inflation as a result of its debt structure. The services sector held up better than manufacturing, remaining broadly positive across the board. However, manufacturing also picked up in the last few months.
Inflation fell across the board in the past few months. This was, however, mostly a result of China exporting deflation. Chinese economic policymakers have increased manufacturing capacity in a bid to aggressively re-capture some of the market share lost because of the trade wars and during the pandemic. Meanwhile, services inflation, especially in the developed world, remained persistently above the 2% threshold.
Employment conditions remained broadly good, despite a slight pick up in unemployment rates. Having said that, the gap between the demand for skilled workers and the supply of certain skills remains quite high, fuelling persistent labour market imbalances which can often translate into higher service inflation.
In this environment, central banks have stopped hiking rates, and have hinted towards rate cuts nearer the end of the year. The European Central Bank (ECB) has already delivered one rate cut. At the time of writing, bond markets were positioning for two rate cuts from the US Federal Reserve and the Bank of England (BoE) and another two from the ECB.
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