World Economies Update & Outlook December 2024

Australia

Australia’s GDP rose by 0.8% for the year and 0.3% for the quarter to September, as the annual pace continued to slow from 1.0% the prior quarter.  Inflation was 2.8% for the year to September, slowing from 3.8% for the year to last quarter, while the quarterly rate of inflation also slowed from 1.0% to 0.2%.  Unemployment was steady at 4.1% for the quarter to October, up from 3.8% a year ago, while rising above post-pandemic lows of 3.5% in 2022, it is well below the pre-pandemic levels of 5% at the end of 2019.  Forward looking indicators appear to be mixed, with the Purchasing Manager Indices (PMI) in Australia strengthening for manufacturing and weakening for services.  Business confidence has rebounded to yearly highs, while consumer confidence surged to yearly highs, both closing the gap to pre-pandemic levels.  Job ads are slowing annually but appear to be turning up towards positive growth from the last two readings.
Overall Australia appears to be grinding lower in GDP terms resulting from lagged effects, however the outlook looks more positive with many leading indicators bottoming and starting to rise. Much depends on the follow-through of the RBA with rate cuts to keep this forward momentum going.

United States

The United States’ GDP rose by 0.7% (2.8% annualized) for the quarter and 2.7% for the year to September, down modestly over the prior quarter and year. Headline Inflation declined to 2.6% in October, down from 2.9% a quarter earlier and 3.2% a year prior. The pace of declines has slowed in the past year following the dramatic falls since peaking at 9.1% in September 2022. Unemployment rose to 4.2% in September up from 4.0% in June and 3.7% a year prior, with some noting the three-month average of unemployment from a year ago had risen by 0.5%, triggering the Sahm rule that historically presages a recession.  Forward looking indicators from the PMI indices in November had the manufacturing PMI rising from a low two months earlier, still indicating modest contraction, while services was expansionary but conflicting between the two official measures.  Small business optimism strengthened over the year and oscillated to peak again at a yearly high over the quarter to October, while consumer confidence was stronger over the quarter and year, having a volatile path.  US growth is resilient despite a recent quarterly slowing while leading indicators are picking up indicating some relief from inflation settling at lower levels and Federal Reserve interest rate cuts in aggregate is supporting businesses and households despite a moderate rise in unemployment over the last year.  How far interest rate policy is eased in the year ahead and the net effects of government spending policy and reforms will be key to maintaining a positive outlook for the US. 

Europe

The Eurozone GDP strengthened off a low base, rising to 0.4% for the quarter to September from 0.2% in the prior quarter, while annual GDP rose to 0.9% for the year to September, up from a 0.5% annual pace to June and from 0.0% a year ago.  Inflation at 2.3% in November was up slightly from 2.2% a quarter ago down slightly from 2.4% a year ago, essentially moving sideways since declining rapidly from the peak of 10.6% in October 2022.  Unemployment declined to a multi-year low of 6.3% in October, down from 6.4% a quarter ago and 6.6% a year ago.  Forward looking indicators from the EU PMI indices are falling, modestly for manufacturing PMI and more dramatically for the services PMI, both weakening on the quarter and but up over the last year, remaining at contractionary levels. Consumer confidence has been on an improving trend over the last year albeit falling in the last month to November.  Confidence in business sectors to November have mostly trending down over the year with the recent quarter marking an improvement in construction industry confidence while manufacturing and services confidence lag.  
Europe is showing signs of a modest recovery in GDP off a very low base from a year ago.  ECB policy cash rates have been cut significantly from 4.5% to 3.4% in three steps between June and October this year, contributing to easier financial conditions and helping the recovery.

China

China’s official GDP remained positive at 0.9% for the quarter and 4.6% for the year to September, with a pickup in the quarterly growth pace not enough to stop the yearly growth rate trajectory to decline slightly in the last quarter and year.  Inflation remains weak at +0.3% for the year to October, down from +0.5% a quarter ago and up from negative inflation of 0.2% a year ago.  Unemployment was at 5.0% in October, the same low level as a year ago, however it reached 5.3% a couple of times during the past year. Forward-looking indicators for manufacturing and services varied between the official measures, which were weak and neutral, versus the private Caixin survey which indicated a pick-up in manufacturing but more modest services sector over the last year.  Consumer confidence remains near lows for the year while improving slightly over the quarter to October. Overall, China’s economy is still struggling to recover as further stimulus measures are put into place, with modest effect. 

Economic outlook

The overall economic outlook is improving with economic data and forward indicators improving on the whole over the last year with the exception of China.  The US is the strongest economy overall compared to recent years, while China struggles amidst still weak consumers and a damaged residential property sector. Australia appears to be picking up into the end of 2024 as forward indicators improve despite a grinding lower in GDP.

Overall, the picture for inflation globally is much improved on a year ago and central banks are easing cash rates, with Australia lagging significantly behind others with a first cut priced between February and May 2025.  The changing political dynamics will be important globally, and in Australia, in 2025 as a new US administration under Trump with a clean sweep of Congress enables strong fiscal policy action.  Australia will face a federal election in early 2025 and there will be some deferral of policy implementation until after the election.  Another US debt ceiling deadline of 1st January 2025 is likely to be deferred although this provides for some budgetary uncertainty and possible further disruption in 2025.

Our base case forecast is for a ‘goldilocks’ aggregate global economy with growth and inflation not too hot and not too cold. We expect the US to be stronger than most economies while Australia, Europe, China and Japan have mildly positive growth. Under this scenario, we expect inflation to remain under control but could be slightly above central bank targets. Households receive gradual relief with a few rate cuts. The sequence of US policies implemented under the Trump administration turn out to be mildly supportive in aggregate.

Our ‘bull’ case is for growth to be resurgent as policy action in the US leans towards positives first, such as company tax cuts, and China finally gains traction with policy measures to lift the economy out of recession and support a rebounding Europe. Inflation, however picks up later in 2025. Australian exports and associated commodity prices surge.

Under a more negative scenario, we expect US policy actions to have a negative impact first, driven by early tariffs and stricter immigration policies raising costs for businesses and households. Inflation remains a drag and impacts households and businesses. The US risks slipping into recession. Australia’s growth falls into negative territory due to lower exports, capped inflation and slow rate cuts by the RBA.

In aggregate, we lean more towards the positive case than the negative, despite our view that 2025 will be a year of significant political and geopolitical impact on economies. We see multi-year trends continuing to support future growth including further technology innovation and associated productivity improvements, while noting increased government spending to address investment requirements for energy transition, critical materials, manufacturing, and supply chain transitions.  We see increased defence spending amid regional conflicts and geopolitical tensions. 

Overall our view is that the size of these transitions ensures a positive tailwind for the next few decades offering new jobs and engagement for many people globally.  The outworking of the higher spending needs is increased debt and gradual or disruptive debasement of paper currencies, lending long-term investments that have protective characteristics against inflation, and defending purchasing power to be in high demand. 

 

Click here to read the Investment Perspective Public Markets Summary and Outlook for 2025

Click here to read the Asset Class Performance and Outlook December 2024

 

 

 

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.