The global economy — Quick spring 2024 update

The latest US inflation data — particularly in the services and rental sectors — have given markets pause for thought. For a while now, the broad narrative has been one of weakening inflation in the context of restrictive central bank policy. But resilient US labour market conditions and robust economic growth challenge that narrative, and suggest a risk that inflation will start to rise once again.

We are already seeing this in services and rental sectors, with inflation in both sectors having either stopped falling well above a rate that is consistent with the Federal Reserve’s policy target, or having actually bounced a little higher. We need to see more evidence as to where inflation is heading. Is this a temporary stop in the broad disinflation trend? Or have markets overstated the extent to which central banks have actually made policy restrictive? And therefore, how much will they reduce interest rates in the remainder of 2024?

As mentioned earlier, we’re still cautiously optimistic. The US has continued to demonstrate resilience, driven primarily by strong growth in real household income. Other parts of the world are still pretty soggy, but are at least beginning to show tentative signs of recovery. This includes Europe and even China. And in Japan, running contrary to the broad policy easing theme, the Bank of Japan is sufficiently confident that inflation is finally becoming entrenched close to its 2% target rate. It moved away from its negative interest rate policy in March, albeit with a dovish and small rate increase.

Global manufacturing sentiment indicators do appear to have found a bottom. That’s partly because of US resilience, and partly because of Chinese policy stimulus. Reflecting its significant structural problems, this Chinese policy stimulus is not benefiting domestic Chinese growth as much as it’s benefiting growth in countries that are economically attached to China, such as Korea and Taiwan.

So, on balance, while there are green shoots in the economy, a mild spring is needed to help them flourish.

As always, we recommend against trying to time the market. It’s a much better strategy to identify long-term appropriate goals and objectives, and build a strategic portfolio that over the long term — say 5, 10 or an even larger number of years — can be expected through all the shorter-term market volatility to deliver those outcomes. Learn how portfolio construction can elevate your investing.

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