For a more comprehensive round up of the week, listen to Stephen’s full report HERE.
Our monthly roundup of global and local economic data and events indicates modest but erratic improvement in global growth. US economic indicators mostly improved, although weaker home buying activity was a notable exception. Growth in China moderated, but not as much as many feared. European economic indicators were mostly stronger than expected. The firmer run of Australian economic indicators continued, although one surprise was lower than expected Q1 inflation which will probably delay the first interest rate hike by the RBA until late in 2014. On monetary policy, the US Federal Reserve (Fed) clarified its position on when the Fed funds rate, currently at zero, is likely to rise in relation to the ending of the Fed’s asset purchase, or QE, program, which should be complete in Q3 2014. US employment needs to be much stronger before the Fed decides to start lifting the funds rate and that looks more likely in 2015, rather than late 2014 implied in earlier comments by Fed Chairman Janet Yellen.
Most economic data released in the US through April reinforces a broadening view among analysts that the US economic recovery is gathering pace. March readings of industrial production, up 0.7% in the month, housing starts, up 2.8%, and retail sales, up 1.1%, all beat relatively buoyant market consensus forecasts. Non-farm payrolls also rose firmly in March, up by 192,000 after an upwardly revised 197,000 increase in February. Most leading indicators of US activity were strong too with March durable goods orders up by a greater-than- expected 2.6% and late April consumer sentiment also beating expectations at 84.1, the third strongest reading in the current recovery. The most notable exceptions to the stronger US economic readings are sales of new homes, down 14.5% in March, and existing homes, down 0.2%. Higher house prices, up around 13% over the past year, seem to be starting to break home buying enthusiasm.
In China, concern in some quarters, that annual economic growth would slow below 7% were confounded by Q1 GDP growth coming in at 7.4%, still down from 7.7% in Q4 2013, but not the collapse some feared. March domestic indicators for China were also comparatively robust with industrial production up 8.8% y-o-y (8.6% in February), retail sales up 12.2% (11.8% in February) and urban fixed asset investment up 17.6% (February 17.9%). The authorities announced additional spending on urbanization plans, mostly bringing forward railway spending projects and the Peoples’ Bank of China announced late in the month small reductions to the Reserve Ratio Requirement (RRR) for some urban and regional banks of as much as two percentage points, although the RRR for the big banks remains at 20%.
Europe continued to slowly improve although with marked differences in the performance of individual economies. Among the biggest economies Germany continues to strengthen and Italy and Spain are a touch better while France continues to underperform. Evidence of recovery is strongest outside the euro-area in the United Kingdom where the unemployment rate has unexpectedly fallen below 7.0%. In the euro-area the unemployment rate also seems to have peaked and hovered at 11.9% in both January and February. Euro-area inflation remains low at only 0.5% y-o-y providing capacity for the European Central Bank to ease policy further id deemed necessary.
In Australia, the run of mostly stronger-than-expected economic readings continued through April. February home building approvals jumped up by 5.0% against expectations of a 1.5% fall lifting the annual change to 23.2% y-o-y. Retail sales consolidated the big 1.2% January gain rising another 0.2% in February. Australia’s international trade position remains exceptionally strong recording an $A1.2 billion trade surplus in February, after a $A1.4 billion surplus in January and mostly driven by rising exports. Importantly, employment continues to improve up another 18,100 in March and bringing the increase in just the first three months of 2014 to 88,000 against a fall of 4,100 in the final three months of 2013. The unemployment rate also seems to have peaked falling to 5.8% in March from 6.1% in February.
Many analysts, including us, feared that inflation would again be quite high in Q1 2014. In the event, the CPI came in lower-than-expected at +0.6%, although the annual inflation rate still rose to 2.9% y-o-y from 2.7% in Q4 2013. The two key underlying inflation measures closely monitored by the RBA, the trimmed mean and weighted median, also came in lower than expected at respectively +0.5%, 2.6% y-o-y and +0.6%, +2.7% y-o-y. Earlier in the month the RBA again left the cash rate unchanged at 2.50% and indicated in the accompanying commentary that it expected inflation pressure to settle back a little.
Looking ahead, we expect Australian economic indicators to be mostly consistent with accelerating economic growth. We see annual economic growth running above long run average (around 3.1%) in the second half of 2014. Also we see the unemployment rate to continue edging lower. Notwithstanding the comparatively low Q1 CPI result we still see inflation returning to surprise on the upside of most forecasts driven by housing pricing pressures and comparatively big price and tax increases emanating from the public sector grappling with budget cut backs. However, the low Q1 CPI does imply to us that the RBA can wait a little longer than we previously thought likely before starting to hike the cash rate. On our forecasts that the CPI is relatively high in Q2 and Q3 we now see the RBA on the road of lifting interest rates, probably starting in November, rather than August as we previously forecast.