JPMorgan Econ FI-Global Data Watch A wide divide-110099108

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Global Economic Research

30 August 2024

JPMORGAN

www.jpmorganmarkets.com

Contents

Neo-exceptionalism and the policy rate path 13

Norway: Food inflation matters more than you

think 18

Mexico: CPI - Short-term gain to turn small pain 21

Andeans: Beyond the business cycle 24

Global Economic Outlook Summary 4

Global Central Bank Watch 6

Economic Activity Tracking 8

Selected recent research from J.P. Morgan

Economics 10

J.P. Morgan Market Watch 11

Data Watches

United States 26

Focus: Let the easing begin 35

Euro area 36

Japan 43

Canada 47

Mexico 49

Brazil 51

Argentina 53

Andeans 55

United Kingdom 57

Emerging Europe 60

South Africa 64

Australia and New Zealand 66

China, Hong Kong, and Taiwan 68

Korea 70

ASEAN 72

India 77

Regional Data Calendars 79

Economic and Policy Research

Bruce Kasman

(1-212) 834-5515

bruce.c.kasman@jpmorgan.com

JPMorgan Chase Bank NA

Joseph Lupton

(1-212) 834-5735

joseph.p.lupton@jpmorgan.com

JPMorgan Chase Bank NA

Nora Szentivanyi

(44-20) 7134-7544

nora.szentivanyi@jpmorgan.com

J.P. Morgan Securities plc

Managing Editor

Malcolm Barr

(44-20) 7134-8326

malcolm.barr@jpmorgan.com

J.P. Morgan Securities plc

Global Data Watch

•US labor market and inflation performance looks different ...

•… bolstering case for relatively fast Fed ease through year-end

• Don’t get carried away with momentum as we look toward 2025

•Next week: Modest US jobs (150k); stable global PMI; BoC eases

A wide divide

Relative to its potential path, the US is the only large economy to have generated

a complete post-pandemic recovery. As the performance gap with other advanced

economies continues to widen—most notably in wealth generation and real

consumer spending gains—it has been reasonable to describe the US as

exceptional (Figure 1). A different type of US exceptionalism, however, is

currently driving shifts in the relative pricing of Fed policy rates and global asset

prices. Despite generating 3.2% GDP growth over the past four quarters—more

than 1%-pt above our estimate of potential—the US unemployment rate now

stands 0.8%-pt above its 2Q23 level (Figure 2). RoW unemployment rates have

remained stable and well below pre-pandemic levels. US core service price

inflation has also moved sharply lower in recent months, while it has firmed

elsewhere. For persistent growth outperformance to be followed by a more

complete normalization in labor market and price pressures would represent a new

and more surprising US exceptionalism phase.

There are good reasons to discount both of this year’s sharp short-term US inflation

swings. Through an up-and-down pattern more extreme than elsewhere US core

service price inflation remains above a 4%ar year-to-date with both shelter and

PCE medical care service prices increasing at an elevated pace. But recent news

does alleviate the concern raised by the early-year price spike. And the easing in

labor market pressures appears to be more established, driven by a mix of softening

in labor demand, rising layoffs, and strong gains in the labor force and productivity.

Disentangling the source of this easing is made difficult by conflicting labor market

signals. For the Fed, softer demand and stronger supply both increase confidence

that service price inflation will move lower while slowing job growth raises

concern about growth. As confirmed by Chair Powell’s Jackson Hole speech,

100

104

108

112

16 18 20 22 24

Index: 4Q19 = 100

Figure 1: DM real personal consumption

Source: BEA, Destatis, Eurostat, ONS, J.P. Morgan

Germany

Japan

-1.0

-0.5

0.0

0.5

1.0

2020 2021 2022 2023 2024

%-pt deviation, incl. US 3Q fcst

Figure 2: U-rate relative to 4Q19

Source: BLS, national sources, J.P. Morgan

RoW (ex. China)

See page 86 for analyst certification and important disclosures.

Bruce Kasman (1-212) 834-5515

bruce.c.kasman@jpmorgan.com

JPMorgan Chase Bank NA

Joseph Lupton (1-212) 834-5735

joseph.p.lupton@jpmorgan.com

Nora Szentivanyi (44-20) 7134-7544

nora.szentivanyi@jpmorgan.com

Malcolm Barr (44-20) 7134-8326

malcolm.barr@jpmorgan.com

Global Economic Research

Global Data Watch

30 August 2024

JPMORGAN

a shift in risk bias prompted by these developments is shaking

Fed gradualism. The size of the September outcome remains

dependent on next week’s employment report—our forecast

for only a modest improvement from July is consistent with a

50bp move—but we believe the Fed is now on track to deliv-

er a roughly 100bp step-down in rates by year-end.

The power of correlated shifts in risk in driving policy action

should also be viewed through the lens of the path of policy

beyond this step down. There is now a broad consensus in

market pricing, Fed forecasts, and our own baseline projec-

tion that rates will fall toward 3% next year in an environ-

ment of trend-like growth and a further drop in inflation.

These views align with the guidance provided by a balanced

Taylor rule that incorporates current Fed forecasts (Table 1).

Around this consensus view lies significant two-sided risk

that macroeconomic developments and shifting perceptions of

risk align with a very different policy path.

Table 1: US Taylor rule policy rate scenarios

Appropriate policy rate, balanced rule

Baseline Recession Resilience

Policy rate (%) 3.25 0.20 4.40

r* (%) 0.8 0.8 1.3

U-rate (%) 4.2 5.5 4.1

Inflation (%oya) 2.3 2.0 2.6

Source: J.P. Morgan Global Economics. Baseline uses June '24 FOMC 2025

SEP: 4.2% u-rate; 2.3% core PCE. Assumes r*=0.8%.

There is an elevated risk that weak labor demand pushes the

US economy toward recession, an outcome that could pro-

duce a cumulative Fed rate cut of 300bp or more. Through

significant financial market transmission, a US recession

would likely depress growth and accelerate easing cycles

elsewhere.

Although recession risk is elevated, we do not see this scenar-

io as likely, in part because of limited private sector vulnera-

bility. In this regard, the solid momentum in consumer spend-

ing seen in this week’s reports is an indication of still

favorable household sector fundamentals. Equally important

is this week’s news on second-quarter profits. Recession vul-

nerabilities are historically linked to profit margin compres-

sion in a maturing expansion. With profits and labor income

generating solid and balanced gains, the pressure on compa-

nies to cut costs is limited (Figure 3).

-10

86 91 96 01 06 11 16 21

%oya

Figure 3: US corp. profits and private wages

Source: BEA, J.P. Morgan; Profits before-tax (IVA, CCA)

Private wages

and salaries

Dom. nonfinancial

profits

If a near-term slide into recession is avoided, an alternative

scenario of growth resilience and sticky inflation may emerge

as an early dose of Fed easing—that offsets risks that don’t

materialize—eases financial conditions and boosts 2025

growth. As our Taylor rule scenarios show, a modest set of

correlated surprises on growth, inflation, and labor market

tightness would have a significant impact on the policy path,

particularly as the Fed would also reassess the risk bias

around its baseline scenario.

All signs point to ECB gradualism

In contrast to the US, the latest Euro area data do not support

a shift away from a gradual easing pace. While growth has

disappointed, resilience in services is helping to offset the

pronounced weakness in manufacturing and the unemploy-

ment rate declined to an all-time low in July. Inflation also

remains sticky as core inflation surprised to the upside in

August leaving it an elevated 3.1%ar over the past three

months. While this likely overstates the underlying pace—as

a 0.5%-pt jump in French services inflation was boosted by

the Olympics—sticky wage and price inflation remain a con-

cern for the ECB. This points to a path of continued quarterly

rate cuts, with the next cut in September.

Poland joined the Euro area in delivering an August inflation

reading that will promote central bank caution. The 4.3%oya

headline CPI increase was higher than expected with a signif-

icant boost from rising food prices. But our estimate of core

also appears to have surprised to the upside for a second con-

secutive month.

Starmer: this is going to hurt

UK prime minister Starmer this week gave a speech high-

lighting that the upcoming October budget would be “pain-

ful”. While the message is not new, the rhetoric is stronger

and this has given way to speculation that there will be signif-

icant tax increases announced in the fall. We continue to think

there will be limits on how far the government can rely on tax

hikes to meet spending challenges, largely because most tax

options are unappealing to the Labour party. For this reason

Bruce Kasman (1-212) 834-5515

bruce.c.kasman@jpmorgan.com

JPMorgan Chase Bank NA

Joseph Lupton (1-212) 834-5735

joseph.p.lupton@jpmorgan.com

Nora Szentivanyi (44-20) 7134-7544

nora.szentivanyi@jpmorgan.com

Malcolm Barr (44-20) 7134-8326

malcolm.barr@jpmorgan.com

Global Economic Research

30 August 2024

JPMORGAN

we expect some of the pain to come from greater restraint in

public spending. A fiscal tightening worth 0.6% of GDP is

already in the plans for next year, and we expect that will

largely remain the case as Labour adjusts the composition

between taxation and spending.

Japan’s virtuous cycle on track

This week's economic data reinforce our view that firming

wage growth will drive a consumption recovery that keeps

inflation on firmer ground in 2H24. The August Tokyo CPI

showed a significant rise in core goods prices (due in part to a

weaker yen) and firming service prices, signaling a reversal

of the softer inflation trend that had been in place since the

start of the year. July also brought improvements in consumer

confidence and retail sales is growing at its fastest since the

pandemic (9.1%3m/3m, saar). We expect rising input costs

and a solid domestic demand recovery to put upward pressure

on core inflation into 4Q and the BoJ to deliver another 25bp

hike by year-end. Next week’s July wage data should provide

further support to our view.

China: policy step-up and re-direction

We expect China’s growth momentum to pick up from 1%ar

in 2Q to 3% in 3Q and 5.5% in 4Q in response to gradual and

calibrated policy adjustments. The special local government

bonds have been lagging behind their typical pace through

2Q, but accelerated into August with 66% of the full-year 3.9

trillion yuan quota now issued. Moreover, the government

looks to be expanding the use of these bonds to support con-

sumption and purchases of excess housing stock, which could

help support the ailing real estate sector in the coming

months. In addition, Bloomberg reported this week that the

government is considering allowing homeowners to refinance

their mortgages at lower borrowing costs.

There is also growing evidence of much-needed policy re-di-

rection. In early August, the State Council issued a guidance

to promote services consumption, including an implicit relax-

ation of educational tutorial policy. While it remains uncertain

how meaningful and sustainable these changes will be, a shift

toward more balanced support for innovations from both the

manufacturing and service sectors can help free up the poten-

tial of the Chinese economy and restore market confidence.

Israel: BoI firmly on hold

The BoI kept its policy stance unchanged this week, but

delivered surprising hawkish guidance that further easing is

unlikely “until well into 2025”. The BoI is less sensitive than

usual to the repricing of the US, as geopolitical uncertainty

and fiscal pressures dominate its assessment of risk. Israel’s

recent macroeconomic performance also warrants caution as

growth is depressed by labor shortages that add to inflation.

Most likely, the MPC wants to see inflation on a clear down-

ward trajectory following an anticipated (VAT-related) rise at

the end of this year. We have accordingly pushed back our

projection for the next cut to April (from November 2024).

FX a varied concern for LatAm CBs

Latin America’s central banks are all typically sensitive to

currency weakening, but we expect them each to respond dif-

ferently to this year's sell-off. Mexico’s Banxico is particular-

ly known for keeping a close eye on the peso as low credit

penetration weakens the transmission of monetary policy to

lending rates. This time around, however, Banxico has adopt-

ed a more relaxed stance, hinting at further rate cuts amid soft

growth; we thus see rising likelihood of an uninterrupt-

ed string of 25bp cuts even as our base case is still for a

November pause. Conversely, the recent bout of BRL depre-

ciation––against a backdrop of strong economic growth and

elevated inflation expectations––has driven a hawkish turn in

BCB communication since the last meeting. This week’s FX

intervention was a testament to that preoccupation with cur-

rency weakness even if action was linked to one-off outflows.

Against this backdrop, we now see BCB hiking 25bp at the

next meeting, with three subsequent moves taking policy

rates to 11.50% by year-end (previously on hold).

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GlobalEconomicResearch30August2024JPMORGANwww.jpmorganmarkets.comContentsNeo-exceptionalismandthepolicyratepath13Norway:Foodinflationmattersmorethanyouthink18Mexico:CPI-Short-termgaintoturnsmallpain21Andeans:Beyondthebusinesscycle24GlobalEconomicOutlookSummary4GlobalCentralBankWatch6EconomicActivity...

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