The pace of global economic growth showed signs of slowing to below long-term trend in January. Growth in international trading volumes is faltering in response to the US initiated tariff war. While the US and China are starting to talk about how to end the trade war, the longer it takes to find an agreement the greater the downside risk to global growth prospects. China has already released Q4 2018 GDP showing easing growth to a decade low 6.4% y-o-y from 6.5% in Q3. The US provides an advance reading of Q4 GDP later this week expected to show around 2.5% annualised growth, down from 3.4% in Q3. Europe also provides a first look at Q4 GDP growth later this week, expected to be around 1.2% y-o-y down from 1.6% in Q3.

The general modest slowing in annual GDP growth rates in the world’s key economies and concern that the slowing growth trend could continue through 2019 is likely to slow or halt the normalisation of monetary policy settings by the world’s key central banks. The US Federal Reserve (Fed) hiked rates every three months through 2018, the last 25bps hike in the funds rate to 2.25% to 2.50% range occurring in mid-December. While the Fed still indicated in December that another two or three hikes were likely in 2019 there have been enough signs of slowing the pace of US economic activity for the Fed to review and pause its plan for more hikes. The Fed has always stressed that policy moves are data-dependent and the on-balance softer US economic readings through December and January imply the Fed on policy pause through at least the first half of 2019.

The Fed is not alone in potentially leaning towards neutral or even easier policy setting. The Peoples’ Bank of China has started to ease policy cutting the Reserve Ratio Requirement for big banks twice in January each time by 50bps to 13.5%. The European Central Bank (ECB) has moved from quantitative easing to quantitative neutral (no net buying of securities but ensuring that maturities are reinvested to maintain liquidity) but indicated at the January policy meeting that policy would not change for some time. The Bank of England has deferred an earlier announced intention to hike rates. The RBA remains strictly on policy hold but statements relating to the next rate move whenever it comes have turned from greater likelihood of a hike to flexibility depending upon economic developments.

In effect, the beginnings of process in 2018 of more central banks taking a leaf out of the Fed’s playbook and starting to normalise monetary policy has been arrested and turned to more central banks turning neutral or even considering monetary policy easing in need in 2019. One consequence of the change in the attitudes of key central banks is that the quite pronounced lift in government bond yields around the world through much of 2018 is over for the time being. Government bond yields could settle lower in 2019.

Returning to some of the key data points in major economies over the past month, the most notable feature has been a softening in what are considered reliable indicators. In the US, January preliminary consumer sentiment fell to 90.7 from 98.3 in December. The December ISM purchasing manager reports for both manufacturing (54.1 from 59.3 in November) and non-manufacturing (57.6 from 60.7 in November) both fell sharply although still held in expansionary territory. December existing home sales fell by 6.4% m-o-m. Set against the weakness in US leading indicators there are still signs of strength in the US labour market. Weekly initial jobless claims fell below 200,000 in the most recent week, a record low. December non-farm payrolls rose by 312,000 and the US unemployment rate at 3.9% in December is still not far off the 50-year low 3.7% reported in November. Despite the brakes on US growth from the trade war, the recent record government shut-down in the Mexican wall stand-off between the President Trump and Congress, and the past increases in US interest rates, the US economy still has growth momentum emanating from good growth in incomes for US businesses and households.

In China, the main signs of weakness are in leading indicators such as manufacturing purchasing managers’ indexes down below 50 (the expansion/ contraction line) in December and a marked pull-back in export growth starting to respond to the higher import tariffs imposed by the US. In December annual growth in China’s exports fell to -4.4% y-o-y from +5.4% y-o-y in November and +15.5% y-o-y in October. The sharp slide in export growth makes it impossible to lift other areas of activity in China quickly enough to compensate. Growth in investment spending and industrial production held up in December but essentially are not accelerating. There was a small lift in the pace of annual retail sales growth in December, but again insufficient to provide compensation for weakening exports. China can ease monetary policy further and boost budget spending, but the drift lower in GDP growth is unlikely to be arrested without a trade agreement with the US.

The reduction in the pace of economic growth is most pronounced in Europe. Government protests in France and the failure so far in Britain to cut a Brexit deal with the European Union are taking a toll on business and consumer sentiment. One saving grace is that the unemployment rate in Europe has continued to fall, down to a decade low of 7.9% in November. As mentioned earlier, the ECB is responding to the deteriorating European growth outlook by providing a measure of certainty that current growth-accommodating monetary conditions will persist for longer. Nevertheless, political unrest in France seems to be spreading and when combined with the growth challenges to Britain and Europe from the fast approaching March Brexit deadline the decline in the pace of European GDP growth seems set to continue.

In Australia, the deterioration in growth and growth prospects seems less pronounced than elsewhere. Over December and January, other than weak housing indicators, most economic readings point to little moderation in the pace of economic growth. Despite concern that pre-Christmas retail spending might be comparatively weak November retail sales rose more-than-expected by 0.4% m-o-m after a 0.3% gain in October. At this stage it seems that growth in consumer spending accelerated in Q4 compared with Q3.

Part of the reason why households continue to spend comparatively in the face of falling house prices; high debt burden; and comparatively low wages growth is that jobs growth remains very strong – a 21,600 lift in December after gaining 37,000 in November – and the national unemployment rate is at 5.0% in December, the lowest in 6 years and is touching 40-year lows in New South Wales (4.3%) and Victoria (4.2%). At this stage jobs growth is accelerating providing testimony to the parts of the Australian economy that are improving and overwhelming the negative impacts from the US-China trade war; slowing pace of global growth; the long lead in to the Federal election (likely in May) and continuing weakness in the housing market.

From the RBA’s point of view, their existing forecasts of slow improvement in Australian economic growth generating mild lift in inflation by late 2019 are still current but possibly subject to more downside than upside risks because of international developments since November. In effect, the RBA has even stronger reason to continue leaving its cash rate unchanged at 1.50%. Some talk in the market that economic conditions are deteriorating to the point where the cash rate may need to be cut later this year seem to be at odds with Australian economic readings that on balance still look quite firm. We see the RBA leaving the cash rate unchanged at 1.50% throughout 2019 and still the strongest probability is that the next rate change will be up, not down, and probably early in 2020.