Global economic growth is losing pace weighed by lessening monetary and government budgetary policy support as well as rising cost of living pressures. Downside risks to economic growth abound from rising interest rates, disruption to food and energy supplies as the war in Ukraine continues and China’s reliance on lockdowns to contain Covid outbreaks. Yet the underpinnings for economic growth remain firm from low unemployment rates in many major economies as well as the past build-up of household savings. If global recession lies ahead, it is not on the cards for another year at least.
In the US, high inflation and the risk that the Federal Reserve (Fed) may need to pedal much harder to contain the problem have increased financial market angst that the economy may slide into recession. Q1 GDP growth slipped into negative territory, -1.5% annualised growth from 6.9% growth in Q4 2021. The GDP growth reversal was largely because of disruption to US international trade that will part correct in Q2. Also, the biggest component of domestic spending in the US economy, real consumer spending lifted in Q1 to 3.1% annualised growth from 2.7% in Q4 2021. Consumer spending is off to a strong start in Q2 with April personal spending up 0.9% m-o-m.
The resilience of US consumer spending is assisted by continuing very strong labour market conditions. April non-farm payrolls were up 428,000 and the unemployment held down at 3.6%. Average hourly earnings were up 5.5% y-o-y. Set against the continuing strength in a major part of the US economy, the Fed is starting to reduce monetary support more aggressively to tackle high inflation. At its May policy meeting the Fed hiked the Funds rate 50bps to 1.00% and promised similar increases at the next two policy meetings. The Fed also stepped up the size of regular sales of bonds and mortgage-backed paper from its asset portfolio.
The Fed’s move stepping up to a 50bps rate hike in May with the promise of more to come almost coincided with the release of the April CPI showing annual inflation slipping to 8.3% y-o-y from 8.5% in March. Hope that US annual inflation has peaked provides hope that after two more 50bps rate hikes the Fed may tighten policy at slower pace. However, we still see the Fed needing to get the Funds rate up to around 4.00% over time given that US annual inflation is unlikely to slide much below 4% over the next year or so given current wage growth above 5% y-o-y and rising prices of services in the US countering in part the inflation reducing impact of stabilising prices of goods and energy.
In China, the data released for April show the growth-crimping impact of lockdowns to contain the spread of Omicron. April fixed asset investment spending moderated to 6.8% y-o-y from 9.3% in March, while industrial production fell 2.9% y-o-y after rising 5.0% in March and retail sales suffered a deepening slump, down 11.1% y-o-y in April from –3.5% in March. The negative impact of lockdowns in Shanghai, China’s biggest international trade port, showed in exports up only 3.9% y-o-y in April compared with up 14.9% y-o-y in March and imports flat (0.0% y-o-y) in April. China’s authorities have started to re-open some businesses in Shanghai cautiously but are still using zero tolerance policies to try and contain the spread of Omicron. Local authorities have been encouraged to spend more on infrastructure and the Peoples’ Bank of China continues to ease monetary conditions. The changes are too little too late to prevent China from experiencing negative GDP growth in Q2.
Europe recorded 0.3% q-o-q, 5.1% y-o-y GDP growth in Q1 2022, but this is showing signs of fading in Q2 and there is a growing risk that Europe will slide into recession later this year, notwithstanding assistance to growth from growing budgetary aid to the EU’s weaker member countries as well as the continuing delay before the European Central Bank starts to hike interest rates to tackle high inflation. High energy prices resulting from Europe limiting supplies of gas and oil from Russia are underpinning high inflation while cutting growth prospects. On the face of it, Europe’s economic readings are holding up. The unemployment rate in March, at 6.8%, was the lowest this century. April purchasing manager reports showed the manufacturing sector index at 55.5 and the services sector index at 57.7, both in expansionary territory. However, cost of living pressure is mounting in Europe. The April CPI was up 7.4% y-o-y while March producer prices were up 36.8% y-o-y. The ECB is more concerned about downside risks to European growth than high inflation and continues to hold its deposit rate at –0.50%.
Australian Q1 GDP is out this week and is expected to show real growth around 0.7% q-o-q, 3.0% y-o-y, compared with +3.4% q-o-q, +4.2% y-o-y in Q4 2021. Essentially, the Australian economy grew strongly by international comparison in Q1 and has started Q2 on a strong note as well. April retail trade rose 0.9% m-o-m and was up 9.6% y-o-y. The unemployment rate slipped below 4% in April to 3.9%, the lowest reading since 1974. Australia, like many other countries is experiencing high inflation, but at 5.1% y-o-y in Q1 is two to four percentage points lower than in the US, EU, UK, Canada and New Zealand. Also, wage pressure supporting high continuing inflation is less in Australia with the latest Q1 wage price index up 0.7% q-o-q, 2.4% y-o-y.
The RBA had to recognise in May that inflation was higher than it had forecast previously, forcing a rate hike at its May policy meeting, but a standard 25bps rate hike taking the cash rate to 0.35%. While the RBA admits that it is now on a path to normalising the cash rate the steps can afford to be measured by international comparison because Australia’s inflation challenge is of a lower order than overseas. It is reasonable to expect RBA rate hikes in steps of 25bps rather than steps of 50bps in countries such as the US and UK trying to contain higher rates on inflation.
Australia’s change of government in May will make little difference to Australia’s robust near-term growth prospects but it may influence the pattern and size of RBA rate hikes. The new Government promised before the election to argue at the June Minimum Wage Case hearing for a 5.1% increase to cover inflation. Some of the one-off components in recent inflation have already been compensated by additional government payments. In the unlikely circumstance the Government sticks with arguing for a 5.1% rise in the Minimum Wage and that is granted by the Fair Work Commission, pressure will rise on the RBA to step up rate hikes.
One part of the Australian economy that is showing signs of starting to soften is housing activity. Rising mortgage interest rates are capping borrowing capacity as well as the willingness to borrow heavily. House prices moved lower in Melbourne and Sydney in April and look set to fall further. In other parts of Australia, house prices continue to hold up for the time being. As mortgage interest rates continue to rise housing activity will continue to slow, one softening contributor in an otherwise still growing Australian economy.