Q3 GDP reports indicate that global economic growth has lost some momentum, but there are some signs in improving leading economic indicators that the worst of the growth fade is in the past. Encouragingly, during November leading indicators internationally relating to the manufacturing sector – the sector most susceptible to damage from the US/ China tariff war – are showing signs of basing and starting to improve. There have also been strong indications from US and Chinese trade negotiators that they are close to some form of agreement. Another international political sore point, Brexit, seems likely to be resolved after the British General Election called for 12th December. In the US, Congress has commenced presidential impeachment hearings, but these are not overshadowing the performance of the US economy still growing at 1.9% annualised pace in Q3 with strong underpinning from household spending showing no sign of fading. At this stage, we see a slight lift in global economic growth in 2020 compared with 2019.
In the US, the advance Q3 GDP report showed only slight moderation in annualised GDP growth to 1.9% from 2.0% in Q2. There was a strong contribution to growth in Q3 from personal consumption, up 2.9% annualised in Q3. Importantly, there is a very strong case that personal consumption spending will continue to support US GDP growth in Q4 and extending into 2020. The latest October non-farm payrolls report still shows a very tight labour market with payrolls up 128,000, the unemployment rate at 3.6%, close to a 50-year low, and average hourly earnings up 3.0% y-o-y. Consumer sentiment in the US remains very firm.
Apart from strong US consumer spending, housing activity is firming too. The National Association of home-builders’ index has been at 70 or better in both October and November. October housing permits rose 5.0% m-o-m; starts rose 3.8% m-o-m; and existing home sales were up 1.9% m-o-m. The part of the US economy hit hardest by President Trump’s tariff war with China, manufacturing, is also showing signs of basing and tentative improvement. In October, the manufacturing PMI rose to 51.5 from 51.1 in September and has extended the improvement to 52.2 in November. If the current US/ China trade talks develop into a staged bilateral trade deal the improvement in US manufacturing purchasing manager surveys is likely to become more pronounced.
Meantime, the US Federal Reserve (Fed) seems likely to slowly add monetary stimulus when needed. The Fed has cut the funds rate three times so far, the latest 25bps cut to 1.75% at the October policy meeting. If the US economy continues to show signs of slow improvement the Fed will consider that its mission to dial a soft landing for the US economy has been achieved and it is unlikely to cut the funds rate much more – perhaps another 25bps to 1.50% in the first half of 2020.
China’s economy is showing most sign of damage from the tariff war with the US. Annual GDP growth slipped a little more than expected to 6.0% y-o-y in Q3 from 6.2% in Q2. October economic readings indicate further moderation in growth. Exports were down 5.2% y-o-y compared with -3.2% in September. Fixed asset investment moderated to up 5.2% y-o-y from 5.4% in September; industrial production was up 4.7% y-o-y from 5.8% in September and retail sales were up 7.2% y-o-y from 7.8% y-o-y in September. The authorities are responding to the softness in Q3 and October economic readings with selective spending increases and easier monetary conditions. The Peoples’ Bank of China unexpectedly lowered its official interest rate 5bps to 4.15% at its November policy meeting. China’s growth will be boosted if the trade dispute with the US is resolved. Recent policy measures could also add to the lift in China’s growth prospects. While China may register sub 6.0% y-o-y GDP growth in Q4 2019 this could prove to be the softest quarter in the current growth pull-back.
In Europe, annual GDP growth moderated to 1.1% y-o-y in Q3 from 1.2% in Q2. Quarter-on-quarter growth in Q3 was a touch better-than-expected at 0.2% and the three major European economies Germany +0.1% q-o-q; France +0.3%; and Italy +0.1% all registered growth in the quarter close to the European average. There is no disguising that the big European economies are travelling very close to stalling point. The saving graces are that the European Central Bank although suffering split views among its members is prepared to try and do more with monetary policy and in recent months has lowered its official deposit interest rate to -0.50% and has re-instituted quantitative easing. As in other parts of the world there are also hints of improvement in key leading economic indicators. The November manufacturing purchasing managers’ index, for example, rose a touch more than expected to 46.6 from 45.9 in October. The longstanding thorn in the side of European and British economic prospects, Brexit while still unresolved at least may have a clearer path to resolution after the British General Election on December 12th. Developments in November can best be described as making European economic prospects a little less pessimistic.
In Australia, the economic signs have become mixed through November causing the RBA to advise that it is in “wait and see” mode before committing to any further monetary easing. On the stronger side, the evidence continued to accumulate in November of a strong rebound in home sales and house prices. Housing finance commitments have risen four months in a row. The decline in home building activity, however, is yet to base and home building activity is still likely to detract from economic growth until early 2020. However, the unusual length of the delay between the lift in home-buying activity and new home building could mean that pent up demand causes an unusually large lift in home building activity at some point.
Disappointments in November included soft September retail sales, up only 0.2% m-o-m and with real quarterly retail sales down 0.1% q-o-q in Q3 compared with up 0.1% in Q2. There is no evidence yet that much higher income tax refunds this year compared with last year are lifting retail spending. Also, the long run of monthly increases in employment was broken in October with a 19,000 fall in employment in the month, although total employment was still 2.0% higher than in October 2018. The unemployment rate also ticked up one notch to 5.3% in October. Another cloud was annual wages growth in Q3 edging down to 2.2% y-o-y from 2.3% in Q2.
Prospects for household spending are very important for the RBA. Despite the disappointments in November relating to retail sales; employment and wages growth the RBA wants to see whether with a lag the stimulus from three cash rate cuts plus tax cuts and other policy initiatives from government (the latest various drought and bush-fire initiatives plus a pull-forward of $A4 billion of previously announced infrastructure spending) will boost household spending. The RBA admits it could have made a case for another cash rate cut at its November policy meeting but preferred to wait for more data. The mixed-strength signals in the Australian economy make it likely that the RBA probably will cut the cash rate another 25bps to 0.50%, but it will want the data to show a clear need for another cut and that may not be available until February next year at earliest.