Resilience amid risks: Global economy snapshot

In a data-light week on the domestic front, the release of the latest IMF forecasts for the world economy offers a useful opportunity to step back and consider the remarkable resilience of global economic performance in the face of what has been a daunting series of external shocks. And, more importantly, to review some of the downside risks to that resilience.

Before diving into that global story in more detail, however, a quick check in on the domestic economy is worthwhile. After last week’s strong labour market results, this week delivered another solid reading in the form of the weekly ANZ-Roy Morgan Consumer Confidence Index, which jumped by more than four points to its highest level since January last year. Granted, at an index reading of 87.5, this still leaves consumer sentiment looking weak in levels terms and well below the long-term survey average. But after a record 89 consecutive weeks below, the fact that the index has finally broken back above the 85 mark is noteworthy, with the rise propelled by households feeling much more positive regarding their current and future financial positions. This result also echoes the earlier message from the monthly Westpac-Melbourne Institute Consumer Sentiment Index, which rose by more than six per cent this month to its highest level since the RBA started tightening monetary policy two and a half years ago. Easing inflationary pressures and a growing belief that the RBA’s next move will be to lower, not increase, interest rates help explain this turnaround in household confidence.

There is of course something of a paradox here. The more upbeat households feel, the more likely they are to start spending, and all else equal, the less pressing the case for the RBA to deliver a rate cut. Indeed, last week’s robust labour market reading, supplemented by messaging this week from the RBA Deputy Governor (see linkage roundup below), has seen financial markets push back the likely timing of a first rate cut until May next year. Readers will recall that since June this year I have pencilled in February 2025 as my best guess for a first RBA rate cut. I am sticking with that call for now but will update my views once we have seen the latest Consumer Price Index data, due next week on 30 October.

Now, back to the global economy.

The IMF sees global economic resilience

The IMF opens the first chapter of its October 2024 World Economic Outlook (WEO) by acknowledging that over the past four years, the resilience of the global economy has been put to a severe test. According to the Fund, ‘a once-in-a-century pandemic, eruption of geopolitical conflicts, and extreme weather events have disrupted supply chains, caused energy and food crises, and prompted governments to take unprecedented actions’. The good news is that, by and large, it has been able to absorb these shocks.

Take the case of the post-pandemic surge in inflation and consequent tightening of global monetary policy. Disinflation to date has proceeded without imposing a steep price in terms of higher unemployment. At the same time, the global financial system has managed to absorb higher interest rates and tighter financial conditions more generally with only a handful of market spasms, rather than an outright financial crisis. The WEO credits the successful disinflation process to date to a combination of faster-than-expected falls in energy prices and a ‘surprising’ rebound in labour supply thanks to a substantial contribution from substantial net inward migration into advanced economies. (Since the start of last year, increases in foreign born workers have accounted for the majority of labour force growth not just here in Australia but also in the United States, Canada and a number of European economies), and the unwinding of pandemic-driven bottlenecks.

Another noteworthy example of this resilience relates to global trade. The WEO points out that despite ongoing geopolitical tensions, global trade volumes have not deteriorated when measured as a share of GDP. That is because weaker trade flows between geopolitically competing blocs have been offset by faster growth (within blocs) as well as by increases in trade with third countries. At the same time, trade flows have also adapted successfully to the effective closure of the Red Sea transit route by Houthi forces in Yemen, as well as to lower water levels in the Panama Canal – albeit at the price of longer journey times, increased port congestion and a significant increase in container shipping costs.

Fund has relatively benign baseline for world economy

The IMF baseline forecast is for global growth to remain broadly stable at around three per cent over both the short and medium term. According to the WEO, world real GDP growth is expected to run at 3.2 per cent this year and next, down only slightly from last year’s 3.3 per cent result. Advanced economy growth is expected to be 1.8 per cent in 2024 and 2025, while emerging markets and developing economies are expected to grow at 4.2 per cent over the same period (all figures based on purchasing power parity weights for GDP). Note that this growth outlook is in line with last month’s OECD projections for the world economy, which also predicted world growth at 3.2 per cent this year and next.

Turning from growth to inflation, the WEO’s take is that global disinflation will continue through next year. By end-2025, ‘most economies are expected to be either at [their inflation] target or within a stone’s throw of it’. Across advanced economies as a group, consumer price inflation is forecast to have slowed from 4.6 per cent in 2023 to 2.6 per cent this year and then to two per cent in 2025.

This relatively benign baseline also involves a rebalancing in global monetary and fiscal policies. During 2022-24, the predominant policy mix incorporated monetary policy tightening, alongside loose fiscal policy. But through to end next year, the WEO assumes a rotation in this policy mix, with lower inflation allowing for continued monetary easing, even as fiscal consolidation gets underway in response to rising debt service burdens.

The IMF’s new forecasts for Australia unsurprising

According to the October WEO, the IMF now thinks Australia will see real GDP grow by 1.2 per cent this year and by 2.1 per cent next year, while consumer price inflation is forecast at 3.3 per cent across both years. The unemployment rate is predicted to rise from 4.1 per cent in 2024 to 4.4 per cent in 2025. There is little difference between these projections and the most recent RBA forecasts.

By way of comparison, back at the time of the April 2024 WEO, the IMF expected growth to be a bit stronger this year (1.5 per cent) and slightly softer in 2025 (two per cent). Likewise, inflation was predicted to be higher this year (3.5 per cent) and lower next year (three per cent). The unemployment rate was forecast to be a little higher in both years (4.2 per cent in 2024 and 4.5 per cent in 2025).

Fund sees downside risks to global economic outlook

The WEO reckons risks to its baseline scenario are ‘moderately tilted to the downside’. To provide some context for this judgment, the WEO cites model-based estimates that put the risk of global growth falling below two per cent next year (an outcome that has occurred only five times since 1970) at 17 per cent. At the time of the October 2022 and April 2023 WEOs, the Fund’s models were assessing this risk as 25 per cent. It had then fallen to a 15 per cent chance in the October 2023 WEO and then dropped again to 12 per cent in the April 2024 WEO.

What are those downside risks?

• That the lagged effects of previous monetary policy tightening lead to faster-than-expected falls in growth and rises in unemployment.

• That uncertainties around the ‘last mile’ of disinflation – for example if underlying inflation proves more persistent than expected – trigger a destabilising re-pricing in financial markets.

• An intensification of sovereign debt stress in emerging markets and developing economies.

• A deeper-than-expected contraction in China’s property sector.

• Renewed spikes in commodity prices due to one or more climate shocks, regional conflicts or intensified geopolitical tensions.

• A further increase in protectionism.

• A resumption of the kind of social unrest that peaked in late 2019 and early 2020.

Balanced against those concerns, the WEO also flags two potential upside risks:

• A stronger than expected investment recovery in advanced economies, due to increased public investment crowding in private capex.

• A more enthusiastic than expected embrace of structural reform in advanced and emerging market economies.

Box 1.2 in the WEO presents upside and downside scenarios that attempt to quantify these risks.

• The downside scenario assumes a global increase in tariffs, greater trade policy uncertainty, an extension of the 2017 US Tax Cuts and Jobs Act, a reduction in migration flows (a fall labour supply) to the United States and Europe, and a tightening in global financial conditions. The combined effects of these assumptions are that global GDP is about 0.8 per cent lower relative to baseline by 2025 and 1.3 per cent lower by 2026. The net impact on inflation is negligible.

• The upside scenario assumes that China successfully pursues an economic rebalancing strategy, while the EU boosts public investment. In this case, the combined impact is a 0.5 per cent increase in world GDP and a 30bp increase in headline inflation relative to baseline by 2025.

IMF still predicts ’Low-Growth Regime’ for Medium Term

The Fund describes its near-term baseline as ‘stable yet underwhelming’ which could be seen as a tad uncharitable, given the magnitude of those economic shocks discussed above. What does deserve to be characterised as underwhelming is the medium-term growth outlook, which sees global economic growth slowing from 3.3 per cent last year to 3.1 per cent by 2029. The WEO reckons a familiar combination of headwinds (demographic aging, weak investment, low productivity growth) mean that ‘growth in most economies is expected to remain feeble over the medium term’. This is in line with the IMF’s gloomy prognosis from earlier this year.

Two to watch: Beijing and Washington

As usual, the WEO offers a comprehensive overview of the latest ‘official’ view of the global economic outlook. Add in the analysis from the Fund’s Global Financial Stability Report and the Fiscal Monitor, and there is probably enough reading to keep you busy for at least several days (although YMMV when it comes to the joys of multiple pages of econospeak). While all the issues raised across the IMF’s three flagship publications have merit, there are two big global stories that are currently front of mind.

First, there are the travails of the Chinese economy and the question as to whether Beijing will follow up this September’s big monetary and financial stimulus with some significant fiscal largesse and whether this will involve any substantive progress towards a rebalancing of the Chinese growth model towards household consumption. China’s ongoing struggle with its property market meltdown and record low consumer confidence, plus concerns about demographic pressures and rising trade policy friction, have recently prompted a new round of fears about the ‘Japanisation’ of its economy (we saw a similar bout of angst in 2023). But there is also some hope that bold action by the authorities could yet rejuvenate the country's growth prospects.

Second, there is the looming presidential election in the United States. While the polls (for whatever they are worth) still say the result is too close to call, recent reporting suggests that Donald Trump may be edging ahead. A Trump presidency could trigger somedramaticchanges in US economic policy. Particularly notable are Trump’s trade policies, which at times have involved proposals including a 10 per cent (and sometimes up to 20 per cent) universal tariff on all imported goods and a 60 per cent tariff on all Chinese imports. If implemented, on some estimates these policies would see US tariffs jump to their highest level since the 1930s and the infamous Smoot-Hawley Tariff. That in turn could trigger a profound reshaping of the global trade landscape. Perhaps such concerns go some way to explaining the US election-related results in our latest DSI survey.

What happened on the Australian data front this week?

The ANZ-Roy Morgan Consumer Confidence Index surged by a strong 4.1 points to an index reading of 87.5 for the week ending 20 October 2024. That returns this weekly measure of its confidence to its highest level since January 2023. It also ends a remarkable run of 89 consecutive weeks of sub-85 index readings.

All five subindices rose this week: there were large gains for ‘current financial conditions’ (up 6.4 points), ‘future financial conditions’ (up 4.1 points) and ‘time to buy a major household item’ (up 6.8 points) along with more modest increases for ‘short-term economic confidence’ (up 0.8 points) and ‘medium-term economic confidence’ (up 2.6 points). The two financial conditions subindices are now at 90-week highs and the ‘time to buy a major household item’ is likewise back at its highest level since January last year. Across all five indicators, negative sentiment readings fell to their lowest readings since 2022 or 2023. At the same time, the survey measure of Weekly inflation expectations fell 0.1 percentage point to 4.5 per cent. That is the lowest inflation expectations reading since September 2021.

Please also join us for this week’s episode of the Dismal Science Podcast.

The Judo Bank Flash Australia Composite PMI rose to 49.8 in October 2024, up from 49.6 in September. At a reading of just below 50, that indicates that private sector activity declined for a second consecutive month, albeit only marginally. There was also an ongoing divergence between services and manufacturing activity. The Flash Australia Services PMI Business Activity Index edged up to 50.6 in October from 50.5 in September, signalling a slight increase in the pace of (modest) activity growth. In contrast, the Flash Australia Manufacturing PMI Output Index fell to 43.7 from 44, hitting a 53-month low as the intensity of the manufacturing contraction intensified. According to Judo Bank, the manufacturing sector is now on the verge of recession. In addition, the survey results also reported that average input prices rose at their slowest pace in four years this month, with cost pressures easing in both the manufacturing and services sectors.

The ABS said payroll jobs numbers in the week ending 15 June 2024 were largely unchanged from the month ending 18 May 2024 and up one per cent over the year. The Bureau reported that the flat monthly movement to mid-June reflected the offsetting impacts of growth in jobs in Health care and social assistance and Education and training and falls in employment in Accommodation and food services, Construction, and Retail trade.

This week the ABS also released updated labour market data focused on the labour force status of families. According to the Bureau, as of June this year, there were 7.6 million Australian families, an increase of more than one million since June 2014. Of that total, there were 6.2 million couple families (82 per cent) and 1.2 million one parent families (16 per cent). There were also 3.4 million families with children or dependants, of which 81 per cent had children aged 0-14 years. The ABS said there were 1.4 million jobless families (19 per cent of the total), defined as a family where each member aged over 15 was unemployed, retired, or otherwise not in the labour force. The same data also show that of the 2.2 million couple families with children aged 0-14 years, 73 per cent had two employed parents.

Other things to note . . .

• The RBA Deputy Governor’s Fireside Chat at the CBA Global Markets Conference covered the recent resilience of the Australian labour market, the RBA’s thoughts on the level of the neutral cash rate and the relationship between Australian policy settings and the actions of overseas central banks. According to the Deputy Governor, the reasons that the RBA has not followed other central banks in cutting rates to date are that domestic inflation is still too high and that the RBA was deliberately less aggressive than some of its peers in terms of the previous amount of policy tightening.
• The AFR’s John Kehoe thinks the Australian economy has a problem.
• Also from the AFR, ACCC Chair Gina Cass-Gottlieb on a new era of competition law.
• Australian innovation statistics and insights. According to the data cited, almost 46 per cent of Australian businesses participated in innovative activities in 2022-23 – the highest recorded over the past decade – which ranks Australia seven out of 39 in the latest OECD innovation survey. Australia’s innovation model is one of diffusion, with nearly 95 per cent of innovations adopted by Australian businesses already existing. The number of new world innovations produced in Australia rose from 4.7 per cent in 2020-21 to 5.2 per cent in 2022-23. The most frequently reported barriers to innovation were ‘lack of skills’ (23.2 per cent of respondents) and ‘lack of access to additional funds’ (19.1 per cent of respondents).
• Modelling the potential impact of changes in Australian property tax incentives on capital flow and migration.
• A speech from Productivity Commission (PC) Chair Danielle Wood on higher education and productivity. A look at revisions to quarterly labour productivity growth. And a PC submission on regulating AI in high-risk settings.
• Jobs and skills Australia has launched a new measure of Australian job vacancies.
• Australian evidence on the impact of discretionary tax changes on economic activity.
• From the IMF Annual meetings, blog posts on the global economic outlook, on global financial fragilities and on global public debt. Also, the latest IMF country report on Ukraine.
• The FT’s Martin Wolf gives his take on the global picture. AFR version.
• FT Alphaville on everything you wanted to know about bonds (but were afraid to ask). Note UK examples.
• The Economist magazine has a lengthy special report on how the strength of the US economy has left other rich countries in the dust and a much shorter piece on the troubles facing the German economy.
• Although the WSJ’s Greg Ip reckons that crises at Boeing and Intel represent a US National Emergency.
• Also from the WSJ, the quarter trillion-dollar rush to get money out of China. The Journal estimates that as much as US$254 billion might have left illicitly over the past four quarters.
• Three columns on economics and AI. First, a look at the rapid adoption of generative AI in the United States; second, a take on the macroeconomic effects of AI innovation; and third, an argument that the expansion of AI will likely shrink earnings inequality.
• Related, Goldman Sachs asks, will AI lead to superintelligence or just super-automation?
• In defence of surveillance capitalism.
• Noah Smith reckons EVs are just going to win.
• A joint report from the OECD, WTO, IMF, UNCTAD and the World Bank examines co-ordinated approaches to climate action, carbon pricing, and policy spillovers.
• The ChinaTalk podcast considers Soviet ruins and China’s future.
• The Joe Walker podcast in conversation with Larry Summers on AGI and the Next Industrial Revolution.