During November, economic releases painted a picture of firmer global economic growth on balance. The clearest sign of accelerating economic growth came from the US where annualised GDP growth more than doubled between Q2 (1.4%) and the advance reading for Q3 (2.9%). There were also signs of growth stabilizing in China and a scattering of better-than-expected Q3 GDP growth readings in Japan and the United Kingdom. One big political surprise in the month was the election of Donald Trump as the next US President. Financial markets quickly focused after the election on the growth-positive parts of Trump’s proposals –lower taxes and more government spending – adding to a shift already underway in financial markets re-pricing bond yields higher from very low levels based on an expected prolonged period of very low economic growth with high risk of periods of price deflation.
Returning to the US, GDP growth accelerated sharply in Q3 but there were also signs the pick-up in growth was most pronounced late in Q3 with some carry in to Q4. US household spending took a markedly stronger turn in September and October with retail sales up respectively 1.0% m-o-m and 0.8%. Most readings relating to home sales and housing construction were also very strong in September and October, but with the standout a 25.5% m-o-m lift in housing starts in October, the single biggest monthly increase since 1982. Helping to support the lift in household spending, non-farm payrolls lifted moderately in October, by 142,000 after lifting 188,000 in September, sufficient to drift the unemployment rate down to 4.9% from 5.0% in September. A clearer sign of more buoyant labour market conditions was evident in average hourly earnings, up 0.4% m-o-m, after rising 0.3% in September.
US households are becoming more confident about spending, evident in improving consumer confidence and sentiment readings and underpinned by wages rising faster than inflation, rising household wealth and greater job security. Even previously weak parts of the US economy, such as the manufacturing sector, are starting to lift. Durable goods orders were very strong in October, up by 4.8% m-o-m and even taking out lumpy transport goods orders were still up a much-greater-than-expected 1.0% m-o-m. The tenor of comments from senior Federal Reserve officials, including Chairman Yellen are becoming more upbeat about US economic prospects and are pointing more clearly that the time for the next rate hike is fast approaching. While there are few signs of rising inflation pressures in the US just yet, the risk that they will start to show is increasing. It now seems likely that the Fed will lift its Funds rate by 25bps to 0.75% at its mid-December policy meeting and will probably indicate the likelihood of another rate hike early in 2017.
In China, more signs are showing that economic growth is stabilizing although the balance of the growth drivers in the economy is not quite what the authorities would like to see. In the broadest terms the authorities are trying to dial improving growth in retail sales and production of services and less growth in industrial production and urban fixed asset investment spending. In October annual growth in industrial production went sideways at 6.1% y-o-y, but retail sales growth moderated to 10.0% y-o-y from 10.7% in September while urban fixed asset investment spending accelerated to 8.3% y-o-y from 8.2% and with some evidence of rising residential property construction fanned by rapidly rising house prices (up 12.3% y-o-y in October from 11.2% in September) but threatening to produce too many homes early in 2017. Temporarily economic growth may lift on rising residential construction, but ahead of a pull-back as the building boom turns to bust. China’s economic outlook remains precarious even with growth holding up near-term.
In Europe annual economic growth was stable at 1.6% y-o-y in Q3 and indicators of business sentiment have taken a brighter turn. Europe’s unemployment rate, however, remained stuck at 10.0% in September and because of still high unemployment and high levels of refugee inflow from the Middle East the risk is high of big protest votes in a number of European elections starting with the referendum on Italian constitutional reform next weekend but extending to the Netherland and France in the first half of 2017. In the United Kingdom, Brexit is becoming constitutionally challenging with the High Court deciding that British Prime Minister does not have the power to singularly negotiate the exit from the EU. A saving grace is that the British economy is performing much better than expected so far with real GDP up 2.3% y-o-y in Q3.
In Australia, there are early indications that Q3 GDP growth will be quite soft and annual GDP growth will moderate from 3.3% y-o-y in Q2 to 2.8% or less in Q3. Despite improved nominal growth in retail sales in August and September, real retail sales fell by 0.1% in Q3 pointing to quite soft household consumption growth in Q3. Another surprisingly weak Q3 reading was Q3 construction work done, down by 4.9% q-o-q with an especially surprising and weak showing from both residential building work done, down by 3.1% q-o-q in Q3 and coming after four consecutive quarters of solid growth, and non-residential building work done, down by 10.9% q-o-q and biggest fall in quarter of a century. There are signs from building approvals that the falls in residential and non-residential work done are temporary, but the negative impact on Q3 GDP cannot be avoided.
The monthly economic readings are a little more promising, especially international trade rapidly improving and helped by much better commodity prices over recent months. The trade deficit improved to $A1.23 billion in September from $A1.89 billion in August assisted by a 1.6% lift in exports in the month. The most recent labour force report for October also contained a flicker of hope that the soft patch evident in employment growth so far this year may be over. Employment lifted by 9,800 in October after falling by 29,000 in September, but the impressive part of the reading was a sharp improvement in full-time employment, up 41,700.
While Australian economic readings are looking a little patchy in their relative strength of late, the RBA appears to be becoming more convinced that Australian growth will improve over time in part assisted by diminishing headwinds from falling mining investment spending and commodity prices holding on to recent gains. The RBA left the cash rate unchanged at 1.50% at its November policy meeting and in the subsequent quarterly Monetary Policy Statement and speeches by senior officials, including newly appointed Governor, Philip Lowe, implied that there is little pressure to change the cash rate. Interestingly, the pronounced sell-off in government bond markets over the past month or so is adversely impacting Australian commercial banks’ funding costs and they are starting to lift their lending interest rates. Increasing lending interest rates may serve to cap the current boom in parts of the housing market and could even pressure the RBA to consider a cash rate cut, although there are no signs that the RBA will be considering such a move over coming months. Our view is that the cash rate will be stable at 1.50% for the next year at least.