Global economic readings in August were mixed-strength with the two biggest economies in the world, the United States and China, showing divergent growth readings. US economic growth accelerated in Q2 and shows promising signs of further improvement in Q3 keeping alive the question of how soon the Fed may start to raise interest rates. China, in contrast continues to show signs that growth is struggling. Economic growth also remains soft in many emerging economies too. Australian economic readings through August remain consistent with sub-potential economic growth. These mixed growth trends and mixed policy responses too impacting commodity prices and currencies are promoting greater financial market volatility.
Returning to the world’s biggest economy, the US seems to have taken a stronger turn through August. The second reading of Q2 GDP showed annualized growth at 3.7%, well up from the advance reading of 2.3% and 0.6% in Q1. Monthly economic readings for July and August business and consumer have also mostly taken a stronger turn, pointing to Q3 GDP growth also coming in around 3% or better. Housing activity appears to be leading stronger US growth with July existing and new home sales up respectively 2.0% m-o-m, and 5.4%. Homebuilders are particularly optimistic and the August National Association of Homebuilders’ index rose to a 10-year high 61. Importantly, employment continues to grow and in July non-farm payrolls rose by 215,000 keeping the unemployment rate steady at 5.3%.
The greater consistency in US growth set against signs of weakness in global growth present the Federal Reserve with a particularly difficult backdrop to its decision whether to raise rates or not when it next meets in mid-September. US growth readings taken in isolation point to a strong case for a first rate hike, but a US rate hike could compound issues promoting softness in the global economy that could rebound negatively on US growth prospects. It is a close call whether the Fed will hike in September or wait a few more months.
In China, economic readings released in August were softer than expected and implied that growth continues to slow despite the policy easing initiatives of the authorities to date. July industrial production rose by 6.0% y-o-y, down from 6.8% reported in June. July retail sales rose by 10.5% y-o-y edging down from 10.6% y-o-y in June, while July urban fixed asset investment spending was up by 11.2% y-o-y, but down from 11.4% y-o-y. The August flash manufacturing PMI also slipped further in to contractionary territory to a 2-year low of 47.1 from 48.2 in July.
The softer run of data occurred at a time when the authorities in China were also acting to try and arrest sharp falls in China’s sharemarket and to add greater flexibility to China’s exchange rate setting mechanism including a comparatively large depreciation of the yuan against the US dollar at one stage in the month. Monetary policy was also eased for the fifth time since November 2014. All told, the combination of weaker-than-expected data and seemingly less than perfectly orchestrated policy responses added to financial market doubts about China’s growth prospects.
In Europe, economic readings remained mixed-strength. The preliminary Q2 European GDP reading was a touch softer than expected coming in at +0.3% q-o-q and +1.2% y-o-y and compared with +0.4% q-o-q and +1.0% y-o-y in Q1. Growth was worryingly soft in Q2 in the bigger European economies with German GDP up 0.4% q-o-q, but Italian GDP up only 0.2% and French GDP flat in the quarter. Encouragingly the revival in Spanish GDP evident in Q1 continued in Q2, up 1.0% q-o-q. During August a bail-out package was finally agreed for Greece although one cost was the resignation of the Greek Government presenting some uncertainty as Greece goes to the polls.
In Australia, mixed growth signals persist although weak commodity prices crimping Australian national income still point to pronounced downside risks to economic growth. The strongest part of the economy remains housing activity although there are signs that housing may be topping out. Housing finance commitments have become volatile with the number of owner-occupier commitments up 4.4% in June, but after falling by 7.3% in May. APRA’s macro-prudential controls continue to show signs of limiting bank lending for investment housing with the value of new investor loans down by 0.7% in June and likely to fall further as interest rate increases delivered by several lenders in July and August take effect.
Beyond housing, retail sales were stronger than expected in June, lifting by 0.7% after an upwardly revised 0.4% increase in May. However, business investment spending remains very weak falling by a further 4.0% in real terms in Q2. Domestic spending in the economy appears to be growing no better than 1.0% y-o-y in real terms and real national disposable income growth is falling, weighed by Australia’s declining terms of trade, very weak wages growth (up only 2.3% y-o-y in Q2) and struggling growth in company profits.
Despite almost certainly sub-potential Australian economic growth in Q2 and probably persisting for some time one important saving grace is that employment is growing sufficiently to keep the unemployment rate comparatively stable – although it did blip up to a six-month high of 6.3% in July.
Employment growth has been surprisingly strong, up 38,500 in July after rising by 7,000 in June, but weak wages growth points to changing composition in employment in favour of lower paid jobs.
The RBA left the cash rate unchanged at 2.00% at its August policy meeting and was comparatively upbeat in its assessment of the global and Australian economies in its quarterly Monetary Policy Statement. Given the potential downside risks to the global and local economy we still see the RBA delivering at least one more cash rate cut with the next one probably at its November policy meeting just ahead of its latest revisions to its economic forecasts in the November quarterly Monetary Policy Statement.