Global economic growth looks set to accelerate modestly in 2020 notwithstanding a range of challenges from heightened political tension in the Middle East and the corona-virus outbreak to managing the aftermath of the bush-fire crisis in Australia. As always there is catalogue of potentially growth crimping challenges, but the latest economic readings around the world mostly point to global growth lifting compared with 2019. Growth is improving still with capacity to spare presenting little likelihood of a lift in inflation of an order to concern central banks. They for the most-part are keeping the monetary spigots wide open. There is also greater likelihood that the world’s central banks will be joined by governments loosening their budgetary purse strings to promote growth including in Australia.
Turning to the signs of stronger growth in recent data releases, in the US almost all indicators of housing and consumer spending released in January have been strong. The National Association of Home-builders’ Index was 75 in January after 76 in December, both unusually high readings. Housing starts in December rose 16.9% m-o-m after lifting 3.2% in November. December existing home sales rose by 3.6% m-o-m. November pending home sales rose 1.2% m-o-m. December retail sales rose by 0.3% m-o-m with a particularly strong 0.7% lift in core sales.
Supporting the strength in US housing and consumer spending the US labour market continues to strengthen with non-farm payrolls up 145,000 in December after gaining 256,000 in November and the unemployment rate still at a 50-year low 3.5%. Importantly, although average hourly earnings are rising at close to 3% y-o-y unit labour costs are still contained. US producer prices rose 1.3% y-o-y In December while CPI inflation at 2.3% y-o-y in December looks a touch high the producer price pipeline and contained unit labour costs point to little chance of inflation pushing any higher. The Federal Reserve (Fed) meets later this week for the first time in 2020 and is likely to maintain the funds rate unchanged at 1.75% with a message that although the US economy is performing relatively well there is no need for less monetary accommodation in the near term.
After the Fed meeting, the first reading of US Q4 GDP is due late this week and is expected to show annualised growth around 2.1% the same as in Q3. The main contributor to growth in Q4 is likely to be strong household spending more than outweighing softness in business investment spending and exports.
China’s GDP growth rate in Q4 came in as expected at 6.0% y-o-y down from 6.2% in Q3 and the slowest annual growth rate in 30 years. In the near-term, growth may improve a little in China responding to policy stimulus during 2019, but China’s now advanced stage of economic development points to inevitable attrition in growth longer-term. China’s December economic readings mostly were a touch better than expected. Exports lifted to +7.6% y-o-y from -1.3% in November and the first-stage trade agreement signed off in January with the US while not greatly improving China’s export prospects should help stabilise trade. Fixed asset investment spending improved slightly in December to +5.4% y-o-y from +5.2% in November while retail sales growth was steady at +8.0% y-o-y, the same as in November. Industrial production, however, slipped to +5.7% y-o-y from +6.2% y-o-y in November. The list of economic challenges facing China is extensive and includes industrial over-investment; too much corporate debt; too much household saving and too little household spending; and population capping out and starting to decline. The headwinds to China’s longer-term growth prospects imply that while China may contribute to near-term improvement in global growth it is more likely to become a brake on longer term global growth.
In Europe, annual economic growth has stabilised a touch above 1.0% y-o-y and past policy easing by the European Central Bank plus signs that some European countries are close to providing more budget stimulus point to stronger European growth in 2020. Britain enters the first stage of Brexit later this week with increasing hope that the still comparatively lengthy divorce proceedings that lie ahead will be less disruptive to British and European growth prospects than previously indicated. Several leading indicators of European economic activity have taken a brighter turn in January among them the January ZEW economic sentiment survey lifting to +25.6 from +11.2 in December and the January manufacturing PMI rising to 47.8 from 46.3. The European Central Bank at its January policy meeting left rates unchanged but continues to focus on potential downside risks to European growth and in subsequent briefing by President Christine Lagarde continues to put the call out to European governments that are able to commit to fiscal stimulus.
In Australia, despite devastating bush-fire the economic outlook took a brighter turn in January after a run of better than expected economic readings. November retail sales jumped 0.9% m-o-m (attributed mostly to strong Black Friday sales); home building approvals lifted 11.8% m-o-m and are starting to trend higher; the value of owner-occupier home loan commitments rose 1.8%, the sixth consecutive monthly increase and now up 10% y-o-y; the trade surplus was bigger than expected at $A5.8 billion mostly on a 2% lift in exports and up from $A4.1 billion in October. Back in December the November labour force report was stronger than expected with employment up 39,900 and the unemployment rate unexpectedly falling a notch to 5.2%. The latest December labour force report was again stronger than expected with employment up 28,900 and the unemployment rate falling another notch to 5.1%.
While the economic reports have been surprisingly strong consumer and business sentiment readings have remained soft and the extensive bush-fire damage will detract from economic growth in the near-term. The bush-fire crisis has also provided catalyst for a change in Government Budget thinking from prioritising return to Budget surplus and retiring Government debt to spending whatever it takes to help bush-fire affected areas recover. Australia is joining the ranks of the countries starting to provide fiscal stimulus to promote growth and in Australia’s case the money will start to flow almost immediately.
For the RBA the recent economic reports paint a picture of slightly better growth and labour market conditions than forecast in its November Monetary Policy Statement. There may not be enough evidence to warrant an upgrade to the RBA’s economic growth forecasts in the next Monetary Policy Statement due the first Friday in February, but there have been enough positive surprises to make it very difficult to argue the need for a further rate cut at the policy meeting the first Tuesday in February. Also, the data readings would need to take a noticeable and consistent turn for the worse to bring the prospect of further monetary easing back into play. At this stage we think it unlikely that the need for further monetary easing will come back into play any time this year, especially with signs of improvement in global economic growth and the Government turning on the budget spending tap to promote bush-fire recovery. We see the cash rate staying at 0.75% throughout 2020.