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 shows diverging paths for the world’s two biggest economies with the US economic expansion gaining traction, but the previously promising signs of stronger economic growth in China faltering in August. The economic position in Europe remains fragile. Geopolitical concerns relating to the Middle East eased a little although the Ukraine remains on war footing. The world’s major central banks, including the RBA, are mostly trying to support economic recovery, leaving official interest rates low for as long as possible although, when the US Federal Reserve (Fed) will eventually start to lift interest rates is a key focal point for interest rate markets.
In the US, business surveys released in August were mixed-strength, but still comfortably in expansionary territory pointing to improving business spending through the second half of 2014. Encouragingly, indicators of housing activity improved indicating that the earlier soft patch was just that. The National Association of Homebuilders’ index reading, at 55, was better than expected and the highest reading since January. Housing starts powered ahead in July by 15.7% while existing home sales registered a second consecutive monthly increase of 2.4% in July. Soft housing activity had been an area of concern for the Fed, but that concern may be starting to fade.
Turning from housing activity at the leading edge of US economic growth the lagging indicator of non-farm payrolls growth remained strong in July. Up another 233,000 and marking the sixth consecutive monthly lift of 200,000+, it marked the strongest run of monthly increases since 1997. The US appears to be entering a virtuous cycle where economic growth promotes stronger employment growth which in turn, fosters further economic growth. Financial markets have started to focus on the declining US unemployment rate (6.2% in July) and speculate how much time there will be between the Fed finishing its asset purchase program or QE (probably in October) and the first official interest rate increase. Recent statements from the Fed have been enigmatic with the minutes of the latest policy meeting indicating that if the economy improves faster than expected rate increases could come sooner. This was apparently contradicted by Fed Chairman Yellen’s speech at the Jackson Hole conference indicating that there is still plenty of slack in the labour market warranting rates staying low for longer.
In China, the economic numbers took a mostly softer turn with the notable exception of July exports up 14.5% y-o-y compared with 7.2% y-o-y in June. Among the softer-than-expected July readings; industrial production was up 9.0% y-o-y (9.2% y-o-y in June), retail sales were up 12.2% y-o-y (12.4%), and urban fixed asset investment spending was up 17.0% y-o-y (17.0%). Apart from the official data points, house prices mostly declined in July and residential construction spending continues to fall. The flash reading of the August HSBC-Markit manufacturing purchasing Managers’ index fell more sharply than expected to 50.3 from 51.7 in July. The softer run of economic readings point, at this stage, to GDP growth slipping off 7.5% y-o-y pace in Q2 to nearer 7.0% in Q3, possibly leading the authorities to adopt more stimulatory policy settings.
In Europe, the data from the common currency area continues to point to weak economic growth. The initial reading of Q2 GDP came in at only 0.1% q-o-q, down from 0.2% in Q1. In the bigger euro-area economies growth was disappointing mostly with Germany and Italy both contracting by 0.2% q-o-q and 0.3% respectively. France was flat in the quarter and the only bright point was Spain showing growth of 0.6% q-o-q. Alongside soft growth, the inflation pulse has been weak in Europe too, only 0.4% y-o-y in July. Pressure continues to build on the European Central Bank to ease monetary policy further, notably to institute full-blown quantitative easing. The latest July policy meeting however, indicated that the ECB is on protracted policy hold after the easing moves back in June. Outside the common currency, the strong recovery in the British economy continued in Q2. British GDP rose by 0.8%, 3.1% y-o-y after increasing by 0.8%, 3.0% y-o-y in Q1. Despite the improvement in the British economy, the Bank of England still maintains very easy monetary conditions, but will probably be among the first of the major central banks to start lifting interest rates, most likely early in 2015.
In Australia, while monthly business and consumer sentiment readings have improved, most of the official monthly economic readings were soft through August. There are some exceptions. Retail sales rose by 0.6% in June but the improvement came too late to save the quarter and the volume of retail sales fell by 0.2% in Q2 after increasing by 1.3% in Q1. Another stronger data point was June private sector credit, up 0.7% in the month and led by stronger commercial credit. Credit may expand even more strongly over coming months given that lending finance commitments rose very sharply in June, by 7.7% in the month led by an out-sized 12.1% leap in commercial finance commitments – a sign that non-mining business investment spending may be starting to stir.
On the soft-side, home building approvals fell by 5.0% in June, albeit after an upwardly revised 10.3% increase in May. International trade remained in substantial deficit in June, -$A1.68 billion, from -$2.04 billion in May. In Q2, it appears that the trade position has deteriorated by more than $7 billion compared with Q1 implying that net exports made a substantial detraction from economic growth in the quarter. Labour market readings were also disappointingly weak. Employment fell by 300 in July and the unemployment rate lifted to 6.4%, a 12-year high. Wages growth remained very soft in Q2, up 0.6% q-o-q, 2.6% y-o-y.
The Reserve Bank (RBA) left the cash rate unchanged at 2.50% at its August meeting (the thirteenth consecutive meeting where the rate has been unchanged) and indicated again in the accompanying statement that a further period of stability in interest rates is what the economy needs. In subsequent statements – the quarterly Monetary Policy Statement, the minutes of the August policy meeting and Governor Stevens’ appearance before the House Standing Economic Committee – the RBA downgraded slightly its growth and inflation forecasts and made it plain that monetary policy has done as much as it can to support growth, but also that while the economy continues to languish, stable rates should stay in place. We changed our interest rate view early in August and now think it unlikely that the RBA will be lifting the cash rate before late 2015 (probably November). There is a small chance that the RBA could lower the cash rate further, but the likelihood of a cash rate cut seems to have reduced with the various comments from the RBA during August.