Inflation in the US fell to 2.9% in July, nearing the Federal Reserve’s target of 2%, although the unemployment rate increased. The UK economy showed growth of 0.6% in both the first and second quarters of 2024, rebounding after a downturn in the latter half of 2023. The Bank of England (BoE) cut interest rates in August for the first time since the pandemic, while the Reserve Bank of New Zealand (RBNZ) also reduced rates for the first time in over four years. In South Africa, real interest rates reached an 18-year high, prompting speculation that the South African Reserve Bank (SARB) may lower rates in September.

US Inflation Declines to 2.9% in July

In July, US consumer prices saw a modest increase, leading to the lowest annual inflation rate since the pandemic began. This suggests a cooling economy and raises the likelihood of interest rate cuts by the Fed. The CPI registered a year-on-year increase of 2.9%, down from 3% in June, marking the first dip below 3% since March 2021. This figure met market expectations, with nearly 90% of the CPI increase attributed to a 0.4% rise in shelter costs, which also saw a 0.2% increase in June. Food prices rose by 0.2%, consistent with the previous month, while fuel prices remained stable after two months of declines.

Annual price increases for several categories have already dipped below the Fed’s target of 2%, as businesses cut prices to attract consumers. This latest inflation data contributes to the growing evidence that the rapid price hikes experienced during the pandemic are subsiding, prompting speculation about potential rate cuts at the September meeting. However, the cooling labor market may be affecting consumer sentiment.

UK Economy Continues to Recover with 0.6% Growth

The UK’s GDP grew by 0.6% from April to June, reflecting a recovery from the recession that occurred at the end of 2023. This growth follows a 0.7% increase in the first quarter of 2024 and is driven primarily by the services sector, particularly in IT, legal services, and scientific research. Services have become the largest contributor to the UK economy, significantly outpacing manufacturing and construction, both of which experienced declines between April and June.

The Office for National Statistics noted that the UK economy has now seen solid growth for two consecutive quarters after a brief recession. Despite the GDP growth in the second quarter, June’s performance was flat, with the services sector contributing to growth overall but dragging down performance for that month. In August, the BoE lowered interest rates by 25 basis points to 5%, marking its first cut since the pandemic and reducing the rate from a 16-year high. Inflation rose to 2.2% year-on-year in July, surpassing the BoE’s target, though inflation in the services sector continued to ease.

For Your Interest:

• New Zealand Cuts Rates for the First Time in Over Four Years: The RBNZ reduced its benchmark rate by 25 basis points to 5.25%, the first cut since March 2020, and indicated further reductions may be forthcoming as inflation approaches its target range.
• China Faces Rising Youth Unemployment: Increasing unemployment among young graduates in China has led many to accept low-paying jobs or depend on parental support, creating a new socioeconomic group termed “rotten-tail kids.” President Xi Jinping has emphasized the need for job creation for youth, but challenges remain.
• US Job Growth Slows, Unemployment Rises to 4.3%: The US unemployment rate climbed to 4.3% in July, the highest since October 2021, as job growth significantly slowed. The economy added only 114,000 jobs, falling short of the 215,000 needed to keep pace with population growth.
• South African Women Face Unemployment and Inequality: A Stats SA survey revealed that South African women are significantly impacted by unemployment and inequality in the workforce, with fewer participating in the labor market compared to men over the past decade. However, there have been increases in participation among women with lower education levels and graduates.

South Africa’s Inflation and Rate Cut Expectations

South Africa’s real interest rate reached its highest level in 18 years, leading to speculation that the SARB might consider a rate cut of 50 basis points this year. The gap between the SARB’s policy rate and the inflation rate widened to 365 basis points in July, with consumer price growth at 4.6%, the lowest in three years. This gap is the largest since May 2006, suggesting the potential for lower borrowing costs, which could alleviate pressure on households, boost consumer confidence, and support economic growth. SARB Governor Lesetja Kganyago noted that rate cuts would be considered if inflation trends towards the 4.5% mark. Inflation fell to 4.6% year-on-year in July, down from 5.1% in June, with predictions of a firmer rand and decreasing fuel prices helping to bring inflation closer to the central bank’s target.

Macro Overview

Global Overview: Global equities initially started August negatively but rebounded strongly, with the MSCI World Index gaining 2.64% month-on-month in dollar terms. Weak US employment data contributed to early risk aversion, as the unemployment rate unexpectedly rose to 4.3%. Additionally, the Japanese central bank’s surprise rate hike and plans to reduce quantitative easing added to market caution. Emerging markets also performed well, with the MSCI EM Index increasing by 1.65% in dollars. Global bonds and property continued their upward trend, appreciating by 2.37% and 6.31%, respectively.

Local Overview: South African equities maintained their post-election momentum, with the FTSE/JSE All Share Index rising by 1.38% in rand terms. Industrials increased by 2.98%, while resources faced a decline of 10.14%. Property and financials saw gains of 8.25% and 5.39%, respectively. The bond market also performed well, with the FTSE/JSE All Bond Index up by 2.38% in rands. The rand strengthened against the US dollar, euro, and pound by 2.46%, 0.16%, and 0.13%, respectively, but weakened against the Japanese yen by 3.23%.

For the full articles read more at https://www.gravitonperspectives.co.za/august-2024-economic-review/