For a more comprehensive round up of the week, listen to Stephen’s full report here.
A number of positive economic developments point to the period extending through the early part of 2015 being a relatively strong period for risk assets, including credit. Looking further ahead, the outlook is hazier and there are a number of potential headwinds to economic growth, both globally and in Australia that could return growth to a shallower incline. What seems least likely in 2015 is recession, even though some analysts are quite keen to forecast one. More realistically, it looks like the erratic improvement in global growth evident over the past four years will persist for an extended period, potentially running for several more years.
In the very near term, however, there are reasons to be optimistic. Economic recovery in the world’s biggest economy, the US, has quickened through mid-2014 with GDP growth running at 4.6% annualised pace in Q2 and 3.5% in Q3, the strongest two quarters of growth in a decade. Moreover, GDP growth in Q4 (the data will be released in late January 2015) is shaping up around 3.5% annualised pace too, underscored by particularly strong household consumption spending.
The holiday spending season in the US running from late November Thanksgiving through to Christmas is shaping up as one of the strongest in many years. The preliminary reading of November consumer sentiment released on Friday was at a new recovery high of 89.4 and the optimism of US consumers should hardly surprise given very strong growth in employment every month this year, a tumbling unemployment rate, rising household wealth, low borrowing interest rates and sharply falling gasoline prices. US households are poised to spend up a storm and that is likely to be reflected not just in impressively strong retail sales readings for November and December but also in another very good quarterly US company profit reporting season commencing mid-January 2015.
The rest of the world has been a mixed bag as far as growth indicators are concerned, but that seems on the cusp of a turn for the better too. Growth in the world’s second biggest economy, China, has languished of late and is running shy of 7.5% growth target. October economic readings with the exception of exports were a touch disappointing with industrial production moderating to 7.7% y-o-y from 8.0% in September, retail sales to 11.5% from 11.6% and urban fixed asset investment to 15.9% from 16.1%. However, inflation also stayed very low in China at 1.6% y-o-y in October and the Peoples’ Bank of China is comfortably placed to ease monetary conditions, much as it has been doing over the past couple of months. The Government is also lifting public spending projects – rail and metro projects in particular – to partly counter the negative influence of weak residential construction spending. The worst of the slippage in economic growth in China would seem to be over.
Europe has just recorded its fifth consecutive quarter of positive GDP growth, albeit not particularly spectacular at 0.2% q-o-q, but better than 0.1% expected. Three of the four biggest euro-area economies recorded positive growth – Germany +0.1%, France +0.3% and Spain +0.5%. Italy slipped by 0.1%. Importantly, policymakers in Europe are becoming more growth supportive. ECB President, Mario Draghi continues to work towards expanding the ECB’s balance sheet through asset purchases. Europe’s key political leaders have also signed up to the Brisbane G20 communique proclaiming an aim to boost global growth over time by 2.1 percentage points with focus on greater infrastructure spending, but also with promises of some 800 economic reforms.
In Australia, weaker industrial and energy commodity prices are hurting growth in national income. However, household spending seems to have picked up a notch or two in Q3. Real retail sales rose by a comparatively strong 1.0% q-o-q and household consumption spending is likely to contribute at least 0.5 percentage points (pp) to GDP when the number is released early next month. Other positive contributions to GDP growth look like coming from net exports on rising export volumes even though prices were weak and spending on housing. GDP may have lifted around 0.8% q-o-q in Q3 which should help to quell some of the pessimism swirling around Australian economic prospects at present.
Whether the quickening in global and local economic growth will persist far in to 2015 is more difficult to assess. At some point, the US Federal Reserve is likely to start lifting its funds rate presenting one headwind to growth. Another is the negative impact on US growth from an appreciating US dollar. China will need to accustom the world to a lower growth target for 2015 befitting a huge economy close to becoming the world’s biggest (at some point it should abandon a public growth target completely). Europe will be watched closely for what it is actually doing to enhance growth rather than what it is indicating it may do. In Australia, lower commodity prices will be a fact of life and the boom in house prices will either adjust downwards under the force of excess supply of rental properties or be given a helping nudge from changing capital adequacy provisions for investment housing loans. Even in combination, these factors are unlikely to threaten recession globally or in Australia, but they may mean that growth falls away from the stronger pace evident late 2014 and early in 2015.
In short, after a promising near-term burst of growth the pace settles later in to a moderate growth groove, much as has been the case since the end of the recession after the global financial crisis. Nevertheless, with most of the world’s key policy makers on the watch for too little growth and potential deflation risk it is likely that moderate growth prospects later in 2015 will be met with concerted policy efforts to drive up growth, much as promised collectively at G20 at the weekend.