Global economic growth picked up slightly in August mostly on signs of improving growth prospects in the United States and early indications that European growth had been little impacted by the Brexit vote in Britain. July economic readings from China, however, were mostly softer than expected as too were most Australian June economic readings. A small number of central banks eased their monetary policy settings further in August, including the Bank of England and the RBA. The US Federal Reserve was on the opposite tack with senior Fed officials, including Chairman Janet Yellen, citing signs of improvement in the US economy as potentially leading to an official interest rate hike as soon as the next FOMC meeting in late September.

Returning to economic data released over the past month in the United States economic growth according to the second estimate of Q2 GDP rose at 1.1% annualised pace from 0.8% in Q1 marking a soft first half of 2016 on the face of it. Digging below the surface of the Q2 GDP reading, there are signs of underlying improvement. Consumer spending grew at a strong 4.4% annualised pace in Q2 while a rundown of business inventories detracted 1.3 percentage points from GDP growth in the quarter. Most likely strong consumer spending and attempts by businesses to rebuild depleted stocks will promote much stronger GDP growth in Q3.

July economic readings are also pointing towards a stronger Q3 GDP result on balance. Most housing indicators were strong in July especially housing starts, up 2.1% m-o-m and new home sales up 12.4% m-o-m to the highest level in nearly nine years. July retail sales were a touch disappointing coming in flat after increasing an upwardly revised 0.8% m-o-m in June, but the portents are favourable for spending in August and September assisted by strong employment growth and rising wages. Non-farm payrolls rose very strongly in July, up by 255,000 after a 292,000 lift in June. Average hourly earnings also showed one of their bigger monthly gains in July, up 0.3% m-o-m. It is the stronger labour market indicators in particular that have led senior Fed officials to talk more about possible rate hikes. At the opening of the Fed’s annual Jackson Hole Symposium over the weekend Fed Chairman, Janet Yellen, said that the case for a rate hike has strengthened in recent months. The relative strength of the August non-farm payrolls report due later this week may determine whether the Fed considers a rate hike at its next policy meeting in late September.

In contrast to the US the pace of economic growth in China still seems to be fading. July exports, -4.4% y-o-y; imports, -12.5% y-o-y; urban fixed asset investment, +8.1% y-o-y; industrial production, +6.0% y-o-y; and retail sales, +10.2% y-o-y were almost all weaker than expected and softer than in June. Unless there is a material improvement in August and September readings annual GDP growth running at 6.7% y-o-y in both Q1 and Q2 is likely to slip to around 6.4% in Q3. As always, China’s authorities may act to prime growth through easier macro policy settings but there are mounting impediments to changing macro-policy settings including the pressing need for more economic reform especially of state-owned enterprises that are often the conduit for greater government spending. Also there are signs of unwanted residential property price inflation (house prices up 7.9% y-o-y in July) from earlier bouts of monetary easing. Currency depreciation is the policy tool available with fewest unwanted adverse economic impacts in China. It seems likely that currency depreciation will continue to be the major part of stimulatory growth initiatives from the authorities.

In Europe the dust is settling after Britain’s Brexit vote with comparatively little disruption to the slow economic recovery view. Of course, the real test still lies ahead when and if Britain starts the formal divorce proceedings from the EU. Both the European Central Bank (ECB) and the Bank of England (BoE) remain prepared to act with easier policy settings. The ECB is waiting for more economic information while the BoE chose to act at its August policy meeting cutting its official interest rate 25bps to 0.25% while also surprising by announcing an extension of asset purchases, or QE, too.

In Australia, most June economic readings were pretty dour. Home building approvals fell by 2.9% m-o-m after falling 5.4% in May. Retail trade rose only 0.1% m-o-m in June after a 0.2% increase in May and real retail trade rose in Q2 by 0.4% q-o-q down from 0.5% in Q1. The international trade deficit widened much more than expected in June to $A3.2 billion from $A2.4 billion in May. The signs are that Q2 GDP growth, due to be released next week, will show a much softer quarterly growth rate than the 1.1% q-o-q recorded in Q1.

The RBA decided to cut its cash rate at its early August policy meeting by 25bps to a record low 1.50%. The move was widely expected coming after the low Q2 inflation readings and has been vindicated further by evidence of still very low annual wages growth in Q2 staying at a record low 2.1% y-o-y. The RBA’s quarterly monetary policy statement left growth and inflation forecasts essentially unchanged. According to the RBA annual inflation is forecast to stay below its 2-3% target band all the way out to its most distant forecast for December 2018. The persistence of low inflation is the main reason why it is still likely that the RBA may cut its cash rate further. Another is that the Australian dollar continues to trade more strongly than is warranted by the low terms of trade (export prices relative to import prices).

Patchy strength in house prices is sometimes put forward as a reason that may restrain the RBA from cutting the cash rate further. However, while the main emphasis of government budgetary policy is containment of growth in spending and while there is evidence of persistently low inflation and excess capacity in the economy, we see the RBA continuing to focus on the need to support as strong growth as possible and consistent with its inflation target. We see the RBA considering another 25bps cash rate cut to 1.25% at it early November policy meeting, shortly after the Q3 CPI release which seems likely to confirm the persistence of very low inflation.