In the first half of 2024, the global economic recovery, inflation trends in the US and Europe, and monetary policies of various countries all showed significant desynchronization. Although the medium-term cycles of the two major economies, China and the US, were in resonance, their intersection was weakening. In the second half of the year, the global economy will still be in a moderate recovery process. However, complex factors such as the timing of the Federal Reserve's interest rate cuts, trade protectionism, geopolitical conflicts, and the electoral cycles in Europe and America will still create significant uncertainty, instability, and imbalance, which will also have a series of impacts on China's economy.

I. The first half of the year saw a "three desynchronizations and one weakening" characteristic in the global economy

Characteristic 1: Global economic recovery is not synchronized

In the first half of 2024, emerging market countries such as China, India, Indonesia, and Vietnam, driven by positive factors such as domestic macro policies and the recovery of foreign trade, have a faster economic recovery pace than developed countries. In the first quarter, India's economic growth rate was 7.8%, and the growth rates of China, Indonesia, and Vietnam also exceeded 5%. Within developed countries, there were changes in the ebb and flow of "the US is strong on the surface but weak inside" and "Europe is getting stronger from weakness". Since the beginning of this year, some of the US employment data have been eye-catching. In May, the non-farm employment population increased by 272,000 people, far exceeding the market's expectation of 185,000 people, and also higher than the previous value of 165,000 people; however, macro data such as manufacturing, consumption, and unemployment were all lower than expected. For example, the May ISM manufacturing PMI index dropped to 48.7, a significant decline from 50.3 in March, and the May retail sales monthly rate was 0.1%, lower than the expected 0.3%. This indicates that the US is facing issues such as slowing consumption and weak manufacturing activity. Coupled with the negative effects of long-term high interest rates, the foundation for economic recovery is not solid, and the momentum for economic recovery is likely to be weakening. The final revised data released by the US Department of Commerce at the end of June showed that the actual GDP growth rate of the US in the first quarter was 1.4%, weaker than the 2% of the same period last year. In contrast, European countries have successively shaken off the shadow of technical recession, and the economic recovery is relatively moderate. For example, the UK's GDP grew by 0.2% year-on-year and 0.6% quarter-on-quarter in the first quarter; the eurozone's GDP grew by 0.4% year-on-year and 0.3% quarter-on-quarter in the first quarter, with both Germany and France achieving unexpected economic growth. The European manufacturing PMI in May was 49%, up 1.3 percentage points from April, setting a new high since February 2023. The European Commission's spring economic outlook report also believes that driven by positive factors such as the expansion of private consumption and trade rebound, Europe's economic growth performance is better than expected, and it is expected that the eurozone's economy will grow by 0.8% and 1.4% in 2024 and 2025, respectively.

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Characteristic 2: Inflation trends in the US and Europe are not synchronized

Looking at inflation indicators, the core PCE, a key inflation indicator preferred by the Federal Reserve, rose by 2.6% year-on-year in May, 0.2 percentage points lower than the previous value; however, the CPI in May rose by 3.3% year-on-year, and the core CPI rose by 3.4% year-on-year. Although both are slightly lower than the previous values, they are still far higher than the 2% inflation control target. In contrast, the eurozone's CPI in May was 2.6%, and the core CPI annual rate was 2.9%. The largest economy in the eurozone, Germany, had a CPI of only 2.4% in May, and France's preliminary CPI in June was even lower at 2.1%. Although the eurozone's inflation indicators also face certain rebound pressures, they generally maintain a stable downward trend. Since September 2023, the eurozone's inflation has dropped by more than 2.5 percentage points.

Characteristic 3: Monetary policies of various countries are not synchronized

The global interest rate reduction cycle was initiated by emerging market countries such as Chile and Brazil in the second half of 2023. In the first half of 2024, this interest rate reduction wave has spread to developed countries. In March, Switzerland took the lead in reducing the benchmark interest rate from 1.75% to 1.5%. Since then, Hungary, Sweden, Canada, and others have followed suit in implementing interest rate cuts. On June 6, the European Central Bank announced that the three key interest rates in the eurozone—the deposit facility rate, the main refinancing rate, and the marginal lending rate—were reduced to 3.75%, 4.25%, and 4.5%, respectively. In contrast, to eliminate the impact of long-term negative interest rate policies, the Bank of Japan raised the policy interest rate to the range of 0%-0.1%, which is the first interest rate hike by the Bank of Japan since 2007. Constrained by factors such as inflation stickiness and conflicting macro data, the US has neither rushed to cut interest rates nor chosen to raise interest rates in the opposite direction. Looking at the "dot plot" released by the Federal Reserve in June, there is still a huge divergence within the Federal Reserve on when to cut interest rates, and further observation of the trend of inflation indicators is needed.

Characteristic 4: The resonance between China and the US cycles is weakeningFrom the perspective of the short cycle (inventory cycle), the two major global economies, China and the United States, are still in the transition phase from passive destocking to active restocking, and may need to consolidate for a relatively long period at the bottom. From the perspective of the medium cycle (Kuznets cycle), both China and the United States are also initiating a large-scale wave of equipment upgrades. In the first half of this year, China actively promoted large-scale equipment upgrades in various fields such as industry, transportation, and culture and tourism. From January to May, investment in equipment and tools grew by 17.5% year-on-year. At the same time, the United States has also been making large-scale investments in infrastructure and manufacturing in recent years, driving orders for related equipment in fields such as semiconductor manufacturing, electric vehicle and battery production, and clean energy development. However, due to factors such as domestic politics and trade protection in the United States, the cyclical resonance between China and the United States has not formed an economically mutually beneficial intersection. For example, the United States deliberately excludes the introduction of Chinese-made equipment during the enterprise equipment upgrade process, while strictly limiting the export of high-end manufacturing equipment to China. Currently, China has become the fourth largest trading partner of the United States, following the European Union, Mexico, and Canada. The weakening of the current economic intersection between China and the United States is largely due to unilateral factors of domestic politics in the United States. From historical experience, China and the United States benefit from cooperation. Against the backdrop of the current unstable global economic recovery, it is necessary for China and the United States to jointly play the role of "leader" and lead the global economy to accelerate recovery.

Second, four outlooks for the global economy in the second half of the year

In the second half of the year, the global economy will continue to recover moderately and show more positive changes. However, against the backdrop of the continuous recovery of global trade, trade protectionism in some countries and regions is quietly on the rise. At the same time, before and after the Federal Reserve's interest rate cut "shoes" land, there may be significant fluctuations in the international financial market.

Outlook 1: The global economy continues to recover moderately

The IMF's spring "World Economic Outlook Report" believes that the global economy still maintains significant resilience in 2024. As inflation returns to the target level, the economy will achieve relatively stable growth. The World Bank's "Global Economic Outlook" report released in June also predicts that the global economy in 2024 will be the first stable growth in three years, but the growth rate is lower than the average growth rate of the ten years before the epidemic. The global economic growth rate will reach 2.6%, among which the average growth rate of developing economies is 4%, and the growth rate of developed economies will remain at 1.5%.

We believe that from the perspective of the second half of the year, emerging market countries are expected to continue to maintain a relatively fast recovery momentum. The Eurozone, due to the early adoption of preemptive interest rate cuts, coupled with the recovery of external demand and the further promotion of consumer growth by the Paris Olympics, is expected to maintain or even accelerate a moderate recovery trend. Affected by factors such as the slowdown in the growth of residents' disposable income, the weakening of fiscal policy intensity, and the lag effect of monetary policy tightening, the economic growth and employment in the United States in the second half of the year may slow down relatively, and the whole year may show a "high front and low back" trend, but it may not fall into a real recession.

Outlook 2: The Federal Reserve may usher in the first interest rate cut at the end of the third quarter

Driven by factors such as better-than-expected U.S. employment data and sticky inflation, the Federal Reserve may postpone interest rate cuts and reduce their intensity. The "dot plot" released after the Federal Reserve's interest rate meeting in June shows that the median expectation of the number of interest rate cuts this year has dropped from the 3 times predicted by the "dot plot" in March to only 1 time. Although the U.S. CPI year-on-year increase in May fell to 3.3%, the Federal Reserve is still difficult to judge whether this is a short-term decline or a trend decline, and it is very likely to be inclined to further observe the CPI data in July and August before making a decision. If it is determined that the downward trend of inflation has a trend characteristic, then the probability of interest rate cuts after September will greatly increase.

Therefore, it is expected that the Federal Reserve will start the first interest rate cut at the end of the third quarter at the earliest, and there may be one interest rate cut for the whole year, about 25 basis points; it is possible to have further consecutive interest rate cuts in 2025. After the interest rate cut in June, the European Central Bank will be cautious and will not carry out consecutive interest rate cuts in the short term. It needs to observe whether inflation indicators will rebound, and the next interest rate cut may also have to wait until the end of the third quarter.

Outlook 3: Global trade faces two major challengesSince 2024, the global trade environment has seen a series of positive changes: the relationship between China and the United States has shown a trend of easing and improvement; cross-border e-commerce is booming; new global industrial chains and supply chain networks are accelerating in formation; and after the contraction of global trade, new inventory replenishment demands have emerged. Recently, the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), and the World Trade Organization (WTO) have all predicted that global trade growth will rebound significantly this year. For instance, the OECD estimates that global trade in goods and services will grow by 2.3% this year, significantly higher than last year's 1%, with the growth rate expected to further accelerate to 3.3% by 2025.

At the same time, global trade will face two major challenges in the second half of the year. First, the geopolitical conflicts in the Middle East are intensifying, and the crisis in the Red Sea is unlikely to be resolved in the short term. Some exports from East Asia to Europe still have to bypass the Cape of Good Hope. However, due to the cost and shipping advantage of "Made in China," the geopolitical value of China's "Belt and Road" strategy is highlighted. Second, trade protectionism may further rise. This year, the United States has aggressively hyped the "Chinese overcapacity theory" and imposed additional tariffs on some Chinese goods such as electric vehicles, photovoltaic cells, and port cranes. On June 21, the US Treasury Department released proposed rules for investment restrictions on China, explicitly limiting US entities' investments in high-tech fields such as semiconductors and microelectronics, quantum information technology, and artificial intelligence in China. The European Union has also密集出台了31项对华贸易投资限制措施,宣布对中国产电动汽车加征最高38.1%的进口关税. In the second half of the year, driven by the election cycle factor, it is not ruled out that more countries and regions, including developing countries, will follow the US and Europe to initiate trade protection measures against China.

Outlook 4: International financial markets may experience continuous turbulence

In the second half of the year, factors such as the uneven recovery of the global economy, geopolitical risks, and changes in expectations for interest rate cuts by the Federal Reserve will stimulate global capital to flow back and forth between developed markets in the US and Europe and emerging markets. On the one hand, against the backdrop of the slowdown in the US economy, the faster recovery of emerging market countries and the moderate recovery of Europe may attract cross-border capital to gradually flow out of the US market. On the other hand, there is still a probability that geopolitical conflicts between Russia and Ukraine, and in the Middle East, will further escalate, which will drive global risk aversion to rise, and cross-border capital to flow back to the US market. However, the biggest impact on global capital flows is still the uncertainty of interest rate cuts by the Federal Reserve. Since the earliest interest rate cut by the Federal Reserve will not occur until the end of the third quarter, or slow until the fourth quarter, there may be a large-scale frequent flow of global capital in the third quarter until the Federal Reserve's interest rate hike signal is clear.

The impact of frequent global capital flows on international financial markets is undoubtedly very obvious. From the perspective of the securities market, the expectation of the Federal Reserve delaying interest rate cuts will drive the rebound of US Treasury yields, and market funds will invest in US Treasury bonds that balance safety and higher yields, and the US stock market may face the risk of a correction. From the perspective of the foreign exchange market, due to the delay in interest rate cuts by the Federal Reserve, the US dollar index will continue to be supported at least in the first half of the third quarter, and non-US currencies will continue to bear pressure in the short term; however, it is also possible that under the guidance of expectations, the US dollar index will gradually weaken, and the depreciation pressure on non-US currencies will be reduced. From the perspective of the gold market, the delay in interest rate cuts by the Federal Reserve may intensify the risk of gold price correction in the short term. Once the Federal Reserve issues a clear expectation of interest rate cuts, capital will continue to flow out of the US market, European and emerging market stocks will be significantly boosted, and gold may also usher in a new round of the market. In the second half of the year, as many countries enter the "election year," the rise of far-right political forces in some countries will bring unstable factors to the international financial market.

III. The impact of global economic changes on the Chinese economy in the second half of the year

Given that the Chinese economy has been highly integrated into the global economy, the complex trend of the global economy will inevitably have an impact on the Chinese economy in the second half of the year in terms of foreign trade, capital flows, domestic prices, and the exchange rate of the local currency.

Market diversification is expected to continue to promote export growth. Driven by factors such as the rise in commodity prices, the expectation of interest rate cuts by central banks in Europe and the United States, and the recovery and inventory cycle of the US real estate market, external demand will still improve moderately in the second half of the year, which will further drive exports. At present, ASEAN has become China's largest trading partner, and the growth rate of emerging markets such as Russia, the Middle East, Africa, and Latin America is also fast; on the other hand, China's export resilience to traditional markets such as Europe, the United States, and Japan still exists. From a domestic perspective, four advantages will support exports: first, the systematic export supply and risk response capability brought by the full industrial chain advantage; second, the continuous improvement of the mid-to-high-end manufacturing level, and the continuous improvement of the export commodity structure; especially the proportion of electromechanical and other mid-to-high-end technology-intensive products is increasing; third, the strategy of export market diversification is gradually taking effect; fourth, the rapid development of cross-border e-commerce. However, trade protectionism brought by nearshore outsourcing by developed countries and the US election cycle in the second half of the year may also cause some disturbance to exports.

Equipment renewal demand drives import growth. In the second half of the year, as the economy recovers steadily and China accelerates the promotion of equipment renewal and technological transformation, demand may further warm up compared to the first half of the year. In terms of imported goods, automatic data processing equipment and its components, liquid crystal flat panel display modules, integrated circuits, and high-tech products have grown rapidly. These goods have a high technological content, on the one hand, reflecting the transformation of the economy towards high quality from the side, China's demand for high-tech content goods is relatively strong, and the trend of production and consumption upgrading is gradually established; on the other hand, imported goods with high technological innovation content help promote the rapid development of China's new quality productive forces; and because the demand for these goods is large and the unit price is high, it can also further expand the scale of imports. With the resumption of cross-border personnel flow, China's service trade will also maintain moderate growth in the second half of the year, especially inbound tourism and other service trades are expected to accelerate the recovery.

The direction of capital flows may be reversed. Despite the complex and changeable external environment, China's international balance of payments has shown strong resilience, and cross-border capital flows have been generally balanced in the first half of the year, and foreign investors' willingness to allocate yuan assets has been generally positive. In May, net purchases of domestic bonds reached 32 billion US dollars, a month-on-month increase of 86%, at a relatively high historical level. At present, China's monetary policy remains prudent, the bond market continues to open up, the safety of yuan assets is relatively high, and the expectation of interest rate cuts by the Federal Reserve is about to form. Driven by a variety of positive factors inside and outside, China's securities market will generate greater investment appeal in the second half of the year and will become an important choice for foreign investors to invest.Import-driven inflation propels a moderate rebound in prices. Influenced by the Red Sea situation and the input-type inflationary pressure brought about by the OPEC+ phased production reduction plan, domestic PPI may experience a suppression followed by an upturn in the second half of the year. In the third quarter, the high base factor hinders the continuation of the PPI's upward trend, the domestic real estate drag effect may still persist, rebar steel is still in the destocking cycle, and the prices of durable goods such as construction materials are likely to remain at a low level. In the fourth quarter, due to the global geopolitical situation and the widening supply-demand gap in the overseas commodity sector, the EIA estimates that the average price of Brent crude oil in 2024 will be $84 per barrel, showing a slight year-on-year increase. It is expected that by the end of the year, the cumulative year-on-year increase in PPI will be -0.5%. The cumulative year-on-year increase in CPI by the end of the year is expected to be 1%. Among them, the year-on-year decline in food CPI is expected to narrow, as the basic consumption demand of residents improves, and the drag of pig prices on food prices is expected to further weaken, with the destocking of breeding sows ongoing; non-food CPI still has upward momentum, with a slight increase in the cost of living for residents, including water, electricity, gas, and fuel prices; the price increase for service categories is relatively larger, including tourism, medicine, and domestic services; the real estate market continues to decline, and the preference for high-end consumer goods (luxury cars) decreases, leading to a decrease in the prices of durable consumer goods.

The renminbi exchange rate may usher in a trend reversal. In the first half of the year, the renminbi exchange rate expectations and transactions remained rational and orderly. Affected by the postponement of the Fed's interest rate cut expectations and the escalation of geopolitical conflicts, the US dollar exchange rate and US Treasury yields rebounded and rose overall in the first half of the year. The global foreign exchange market experienced increased volatility, with non-US currencies generally under pressure. The renminbi exchange rate against major currencies fluctuated, with a stable increase against a basket of currencies. In the second half of the year, as macro policies are accelerated and take effect, China's economic recovery and upward trend will be further consolidated. The economic fundamentals will provide strong support for the foreign exchange market and the renminbi exchange rate. The surplus under the current account will be relatively stable, and capital flows may reduce the pressure of outflows and increase the scale of inflows. The balance of international payments will help maintain a relatively stable supply and demand relationship in the foreign exchange market, and the renminbi exchange rate will remain basically stable at a reasonable and balanced level. In the third quarter, if the Fed's interest rate cut expectations gradually become clear, especially if the Fed starts to cut interest rates at the end of the third quarter, the renminbi exchange rate is expected to strengthen and show a stable upward trend. Even if the Fed does not cut interest rates in September, with the interest rate cut "shoes" hanging high, the US dollar will find it difficult to remain strong, and the renminbi may still accompany a weak US dollar to show an upward trend at the end of the year and the beginning of the next year. From the second half of this year to next year, it is recommended to moderately relax the two-way fluctuation range of the exchange rate. Based on the economic situation at different stages, make reasonable choices among the goals of economic growth, full employment, price stability, and balance of international payments to resist and buffer the impact of external factors, thereby improving the efficiency of demand management policies and the control ability of money supply.