Herman van Papendorp, Head of Investment Research & Asset Allocation and Sanisha Packirisamy, Economist at Momentum Investments

Economies at a Glance by Momentum Investments’ macro research team consists of an easy-to-read chartbook of what is happening in the economy and a snapshot of the index returns for the month.

This month’s infographic features the G20 Leaders’ Summit, hosted by India. We take a look at the background of the G20, membership expansion and key takeaways from this year’s summit.

Below is a short summary of what is happening in the world’s largest economies:

United States

After a robust sprint last year, the United States (US) labour market is now experiencing more modest gains as supply aligns with demand and several sectors reach full employment. The unemployment rate, factoring in discouraged workers and those in part-time roles due to economic reasons, climbed to 7.1% in August – the highest since May 2022. Additionally, average hourly earnings fell short of projections, indicating a dip in inflationary pressures and reflecting the impact of previous rate hikes. Despite this, the Federal Reserve’s (Fed) ‘dot plot’ foresees one more hike in 2023 and only 50 basis points (bps) of easing in 2024, down from 100 bps projected in June 2023. Yet, even in this scenario of prolonged high rates, the Fed envisions core PCE inflation hitting the 2% target only by 2026. Consequently, policymakers are resisting an earlier market rate repricing, which could prematurely ease financial conditions before inflation is tamed.

Eurozone

The European Union’s (EU) €300 billion Global Gateway Strategy has advanced with the introduction of the India- Middle East-Europe Economic Corridor (IMEC). This trade route connecting India to Europe through the Middle East presents an opportunity for the EU to bolster its geo-economic influence in the Gulf. The IMEC project encompasses the development of ship-to-rail transit networks as well as telecommunication and energy linkages. European Commission President Ursula von der Leyen emphasized the trade benefits of this corridor during her State of the Union address, alongside advocating for collaboration with legitimate governments and regional entities. Additionally, she touched on various global issues, including Ukraine, climate change, China, irregular immigration and EU expansion, while showcasing her achievements, spurring market expectations of her seeking a second mandate.

United Kingdom

Acknowledging the shortfall in failing to anticipate the recent inflation surge, the Bank of England (BoE) has enlisted former Fed chairman Ben Bernanke to review its forecasting models for both inflation and GDP growth. Bernanke attributes the UK’s unique inflationary experience to a “complex constellation of shocks”, including significant supply chain issues. These unforeseen shocks have increased uncertainty about their impact on the economy, with the BoE forecasting growth of only 0.5% for 2024 and 0.25% in 2025. In a surprise move, the BoE kept interest rates steady in September with a close 5-4 vote split. Despite a sixth consecutive drop in headline inflation in August, it remains elevated at 6.7%. The BoE anticipates inflation hitting the 2% target by the second quarter of 2025, leaving market forecasters projecting the first interest rate cut only by the third quarter of 2024.

Japan

The Indo-Pacific strategy, initially proposed by former Japanese Prime Minister Shinzo Abe and further detailed by US Presidents Donald Trump and Joe Biden, is gaining traction as a significant geopolitical concept challenging the traditional Asia-Pacific order. It emphasises collective defense, exclusive alliances and encourages near-shoring to reduce dependence on China. Japan’s recent support to Sri Lanka underscores this approach, sending a clear message to China. The Quad Alliance, comprising Japan, the US, India, and Australia, advocates for free and open trade, countering China’s expanding military presence in the resource-rich region. Moreover, the renewed trilateral cooperation involving the US, South Korea and Japan extends to cooperation with Pacific Island states, as demonstrated by the August Camp David summit, where leaders affirmed their commitment to bolstering regional architecture and prioritising maritime cooperation.

China

According to the Financial Times, China’s equity market listings (amounting to US$41 billion) have accounted for nearly half of the global total year to date. This is in spite of China’s equity market underperformance in response to slowing growth and an ailing property sector. The Financial Times ascribes this phenomenon to significant policy shifts in China, spearheaded by President Xi Jinping to accelerate technology breakthroughs and reduce dependence on the West. Goldman Sachs notes that Xi is focusing on coordinating innovation at higher levels of government and aims to grow high-tech manufacturing and renewables industries to accelerate the transition to a new growth model. By allowing stock market investors to back these industries, the growth model can change more rapidly. Nevertheless, this is a risky strategy as an enhanced role of the state in China’s stock markets could deter foreign investors.

Emerging markets

In recent weeks, the expansion of the BRICS grouping with six new members and the African Union’s integration into the G20 underscore a shifting geopolitical and geo-economic equilibrium, challenging the dominance of G7 powers. This realignment emphasises an increasingly organised coalition from the ‘Global South,’ primarily representing developing, less developed and underdeveloped nations in Africa, Asia and Latin America. Active engagement of these developing countries on the global stage holds significant implications for fostering a multipolar world and advancing multilateralism. With increased dialogue and institutionalised cooperation emerging as key themes among countries within the Global South, peace negotiations could be furthered constructively. Simultaneously, it will exert heightened political and diplomatic pressure on the US and the West more broadly, curbing unilateralism and disrupting a continuation of unipolar hegemony, which previously dominated the international discourse.

South Africa

Interest rates were kept on hold in the July and September meetings as the South African Reserve Bank (SARB) took stock of the impact of previous hikes on aggregate demand. According to the Bureau for Economic Research’s Manufacturing Survey for the third quarter of the year, nearly 60% of manufacturers view interest rates as a constraint to further investment projects in SA. This share is up from 25% in the fourth quarter of 2021, corresponding to the SARB’s cumulative 475 basis points of hikes between November 2021 and May 2023. A string of positive inflation surprises and a reversal in medium and longer-dated surveyed inflation expectations, particularly for businesses that are seen as price-setters in the economy, likely swayed the decision to keep the repo rate steady in September. The SARB’s forecast on headline inflation inched lower to 5.9% for this year and to 5% for next year, broadly in line with the Reuters median consensus projection. Meanwhile, it raised its growth forecast from 0.4% to 0.7% for this year due to some resilience displayed by households and firms. This is in line with our forecasts, but firmer than the September Reuters’ median consensus of 0.3%. Growth forecasts for the outer years remained unchanged at 1% for 2024 and 1.1% for 2025, relative to the Reuters consensus of 1.2% and 1.5%, respectively, and below our forecasts. Despite an unchanged stance, the SARB maintained a cautious tone, flagging upside threats to inflation and the potential inflationary impact of expansionary fiscal policy.

Download the infographic – click below…

ENDS