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September – in brief
- The world’s second largest economy needed a boost, and it got one.
- In the US, the Federal Reserve delivered a bumper sized interest rate cut.
- The UK stock market has been treading water, as consumer confidence collapses.
China hit the headlines as the government took action
Frankly, it gets a bit boring continually writing about economic growth, inflation, interest rates and I imagine it’s boring reading about those topics all the time. However, they are important and have been the major drivers of financial markets since the advent of COVID and arguably since the 2008 global financial crisis. As much as I’d like to look at other subjects, I’m sort of stuck with these.
However, there is a new kid on the block to have a look at; China. We have been totally wrapped up in what has been going on in the US that it has been easy to ignore the second largest economy in the world. The Chinese economy is a long way behind the US, but, depending on what measure is used, it is over four times the size of Germany, Japan and India, the next in line and over 4 times the size of 6th placed UK.
Like nearly all emerging economies, China went through a massive growth phase, as it opened itself up to trading with the rest of the world which resulted in annual economic growth of between 10% and 15% in the run up to the global financial crisis and between 5% and 10% after that, up until COVID intervened. Indeed, it still has an economic growth target of 5% a year. To put that into context, the Office for Budget Responsibility expects the UK to grow at 0.8% this year. But China has been struggling.
Chinese economic growth (Gross Domestic Product) since 1 January 2000
Source: Bloomberg, 31.03.00 – 30.06.24.
The property sector, both commercial and residential, is a very large and important part of the economy in China. It grew very quickly, driven by very high levels of debt and created a bubble, which didn’t so much pop as develop a large hole that constantly leaked, causing stress in the economy and stock market.
Stresses appear in economies and countries, such as China, as they transition from the manufacturing-based (although this is still very important) less developed phase to a more developed service based economy as wealth is created in the population. When this takes place in a country with a population of around 1.4bn, it is difficult to manage, no matter what the political and societal structure looks like.
As you can see from the chart below, the stock market has struggled since the recovery following COVID in 2022. The CSI 300 Index is made up of the largest 300 companies listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
CSI 300 Index 30.09.19 – 30.09.24
Source: Bloomberg, 30.09.19 – 30.09.24. Past performance is not a reliable indicator of future returns.
But, if you notice that recent uptick, it doesn’t look much on this scale, but it is a move of 18%, which is enormous and all came in the last few days of September. Their best week since 2008. The CSI Index of smaller companies was up nearly 30% from its September low point.
The Chinese authorities announced an economic stimulus package which included $114bn aimed at boosting the stock market. This not only creates wealth within China, particularly for the middle classes, leading to rising consumption levels, it also bolsters the economy. Just as the rest of the world is cutting interest rates to support their economies, the world’s largest exporter is taking action to feed that demand.
The move by the authorities has wider implications as well. Chinese demand is very influential on commodity prices, particularly industrial metals, so we have seen copper, aluminium and zinc all jump. Oil was less impacted as the Saudis were preparing to increase supply, which would dampen the price.
The reaction in financial markets to a change of domestic policy in China, is not always worth writing about. But this is a very impactful change, not just domestically, but globally, given China’s importance.
The US came to the party and is enjoying itself!
For some time we expected that the US Federal Reserve (Fed) would start the global interest rate cutting party, however, they have ended up being fashionably late, but made quite an entrance.
The US economy has remained stronger than anticipated, meaning inflation has not moved back to targeted levels, therefore interest rates stayed elevated. However, more recent data suggests that the economy is slowing more, which is good news on inflationary pressures and has allowed the Fed to make their move. What a move it was! The cut was a whopping 0.5%, rather than the more normal 0.25% and there is a strong likelihood that the trend downwards is quite steep.
In the US economy, the consumer sector is key, given its importance. The University of Michigan Consumer Sentiment Index is seen as a good indicator of how US consumers are feeling and acting. In response to the rate cut, the final reading for September was 70.1, better than the expected level of 69.3 and was the highest since April.
The US economy looks to be in good shape and Fed policy is supportive.
The UK provided quite a contrast
The Bank of England chose not to cut interest rates in September, in my view they should have done, but my view doesn’t count. The Bank is worried about inflation, I think they should be more worried about economic growth, which is very unexciting at present. On top of that we have the new government talking about the bad state of public finances, a period of tough decisions being made and an upcoming budget that will announce significant revenue raising measures.
This has, as you would expect, impacted consumer confidence. The British Retail Consortium announced that their recent poll on consumers expectations for their personal finances over the next three months has dropped to a negative score of 6 from a positive one just a month ago. Also confidence in the state of the economy collapsed to minus 21, from minus 8 in August.
I don’t think we can talk ourselves into recession, but there are real world ramifications of rhetoric and actions. Unsurprisingly, the UK stock market lagged most others in September.