Economic indicators are confused – but a ‘soft landing’ looks less likely than a few months ago

Introduction

Governments and central banks have pinned a lot of their credibility on returning the world economy, after the Pandemic and the inflation shock, to an orderly picture of inflation within the 2% per annum target, economic growth of somewhat more, and interest rates in between the two.

That is their so-called ‘soft landing’. The picture is confused, though, with some apparently good news, but an equal amount of bad, and a goodly amount that does not fit with the ‘soft landing’ scenario:

If the good news indicates underlying strength, inflation does not fall below 2% and interest rates will stay where they are or even increase;
If the good news is isolated, then inflation will relent and interest rates may fall, but triggered by an environment of weak growth or recession, and rising unemployment.

USA

US non-farm payroll fell well short of expectations in August, which created a tremor in US stock markets as it indicated that the economy might be in recession.¹ This in turn gave rise to a narrative that multiple aggressive interest rate cuts could be expected. The US Federal Reserve duly cuts its interest rate by 50 basis points on 18^th September.²

Then US non-farm payroll surged in September 2024 with 254,000 new jobs, 100,000 more than commentators’ estimates.³

US Consumer Price Index (CPI) for August showed a month-on-month rise of 0.2% and a rise of 2.5% year-on-year, the smallest annual increase since February 2021.⁴ The month-on-month rise of 0.2% was repeated in September, inferring that inflation had been tamed and that interest rates could safely fall.⁵ Then the University of Michigan Consumer Survey indicated the opposite, that inflation expectations were 2.9% in October as opposed to 2.7% in September.⁶ In response the yield on 10-year US Treasury bonds has risen to above 4.1%.⁷ Rising inflation is not a ‘soft landing’ scenario: even worse if economic growth is weak at the same time.

Germany and the Eurozone

The European Central Bank had kept interest rates steady from January to May but reduced the rate on its deposit facility by 25 basis points on 6^th June from 4.00% to 3.75%,⁸ and by a further 25 basis points to 3.50% on 12^th September.⁹

Eurozone inflation over that period was 2.4% (April), 2.6% (May), 2.5% (June), 2.6% (July), 2.2% (August) and 1.8% (September),¹⁰ justifying the ECB’s rate cuts in terms of falling inflation.

The cuts were also justified in terms of a weakening economy, although the ECB did not register this: German GDP rose by 0.2% in Q1 2024 but fell by 0.1% in Q2.¹¹ July industrial output fell by 2.4% compared to June,¹² although August output rose by 2.9% compared to July, both the shortfall and the subsequent recovery being attributed to the automotive sector.¹³ Bloomberg now predict that German GDP in 2024 will be exactly what it was in 2023.¹⁴ That again is not a ‘soft landing’ scenario: it is bumpy, and it is not necessarily a landing either.

Elsewhere Fitch Ratings altered their outlook on France from Stable to Negative, whilst affirming the AA- rating for the time being.¹⁵ Moody’s altered their outlook on Belgium from Stable to Negative, whilst affirming the Aa3 rating for the time being.¹⁶ Both rating agencies justified their actions on the difficulties besetting the respective country’s fiscal deficit and debt level.

China

China bears indicators of an impending air crash. The Chinese stock market has been subject to wild gyrations since government officials announced plans for a stimulus package to restore robust growth and to support the real estate market. The Shanghai Composite Index was at 2,500 before the announcement, went precipitously up to 3,500, and now stands at 3,275.

The package is supposed to involve more loan support into the real estate market, subsidies to low-income people, and laxer capital standards for state banks. The size and timing of this package remain unclear.

In the meantime consumer price inflation slackened, and producer price deflation increased – the Producer Price Index was 2.8% lower than one year before.¹⁷ The real estate market – both the commercial and residential ones – continue to fall.¹⁸ Hong Kong has joined mainland China in the decline: prices appear to have fallen 25% since their high point in mid-2021, with a significant inventory of unsold new residential and commercial properties, and vacated property that cannot currently be re-leased.¹⁹

UK

The UK has a new pilot at the controls who appears set on stalling the aircraft in mid-air and then indulging in a display of acrobatics. The UK’s relatively positive GDP growth in H1 2024 has tailed off into nil-growth, whilst the public debt as currently measured now exceeds 100% of GDP. UK consumer price inflation was 0.5% (April), 0.4% (May), 0.2% (June), 0.0% (July), and 0.4% (August), with the respective annualised rates being 3.0% (April), 2.8% (May), 2.8% (June), 3.1% (July), and 3.1% (August).²⁰

The Bank of England cut its Bank Rate on 1^st August by 25 basis points from 5.25% to 5.00%, ostensibly in response to reasonable economic growth in H1 2024 and abating inflation.²¹ Since then, though, inflation has ticked back up, and growth has flattened off, not least because the new government stated that the Conservatives had left a £22 billion fiscal ‘black hole’ and that a tax-raising Budget (scheduled for 30^th October) was needed. In parallel they awarded above-inflation pay rises to public sector workers and trailed better worker rights: firms have duly postponed plans for new hires and investments.²²

Long-term interest rates have increased as well, by 50 basis points to 4.2%. This is because markets fear that when the government says it wants to boost investment, it actually means boosting borrowing, by redefining the UK’s public sector debt so it appears to have fallen below 100% of GDP even though no existing borrowings have been repaid. Such a move would create ‘headroom’ to borrow anew supposedly, but real investors are not so easily fooled.

Conclusion

Financial markets seem to want to latch onto any piece of good news, like September’s US Non-Farm Payroll and Germany’s August industrial output this week. Similarly the promise of a Chinese stimulus package was celebrated, without due focus on why it was needed. Looking at a broader set of indicators does not allow the drawing of a single conclusion about the direction of the global economy, of inflation and of interest rates. One scenario is quite plausible, though: stubborn inflation, interest rates at current levels or even ticking back up, and a weak economy. That’s a bumpy ride, not a soft landing.

¹ https://www.forbes.com/sites/dereksaul/2024/09/06/august-jobs-report-us-added-142000-jobs-in-key-labor-market-update/ accessed on 14 October 2024

² https://www.reuters.com/markets/us/view-fed-slashes-rates-50-bp-first-easing-since-pandemic-hit-2024-09-18/ accessed on 14 October 2024

³ https://www.cnbc.com/2024/10/04/september-2024-us-jobs-report.html accessed on 14 October 2024

⁴ https://www.jpmorgan.com/insights/outlook/economic-outlook/cpi-report-august-2024 accessed on 14 October 2024

⁵ https://www.jpmorgan.com/insights/outlook/economic-outlook/cpi-report-september-2024 accessed on 14 October 2024

⁶ https://tradingeconomics.com/united-states/michigan-inflation-expectations accessed on 14 October 2024

⁷ https://tradingeconomics.com/united-states/government-bond-yield accessed on 14 October 2024

⁸ https://www.ecb.europa.eu/press/pr/date/2024/html/ecb.mp240606~2148ecdb3c.en.html accessed on 14 October 2024

⁹ https://www.ecb.europa.eu/press/pr/date/2024/html/ecb.mp240912~67cb23badb.en.html accessed on 14 October 2024

¹⁰ https://www.ecb.europa.eu/stats/macroeconomic_and_sectoral/hicp/html/index.en.html accessed on 14 October 2024

¹¹ https://www.destatis.de/EN/Themes/Economy/National-Accounts-Domestic-Product/_node.html accessed on 14 October 2024

¹² https://www.reuters.com/markets/europe/german-industrial-output-falls-more-than-expected-july-2024-09-06/ accessed on 14 October 2024