In April economic indicators showed moderating global economic growth for the most part, but with inflation still high enough to concern most central banks. China was an exception with growth gathering pace, but with low inflation. The softening in economic activity in other major economies was still mostly in goods-producing sectors with demand for services staying firm. Earlier fears about the problems in Credit Suisse and some regional US banks becoming more widespread faded in April. Central banks reaffirmed their commitment to contain high inflation and government bond markets gave up some of the yield falls recorded in March as it became clear that more central bank rate hikes may lie ahead and peak official cash rates once achieved may linger for longer.
In the US, most economic reports released in April show some signs of slowing growth in economic activity but a labour market still tight enough to support high wage growth and make the Federal Reserve’s task bringing inflation down to 2% target a slow affair. The headline CPI rose by 0.1% m-o-m in March taking annual inflation down from 6.0% y-o-y in February to 5.0% in March. The underlying CPI excluding food and energy prices however was stickier, up 0.4% m-o-m with the annual inflation rate lifting one notch to 5.6% y-o-y.
Tight US labour market readings say that inflation will remain sticky for some time. Non-farm payrolls rose by 236,000 in March after lifting 326,000 in February. The unemployment rate fell one notch to 3.5% in March, close to a half-century low point and average hourly earnings rose by 0.3% m-o-m, 4.2% y-o-y. If the Fed is to get inflation down to 2% target the US labour market will need to be a lot softer with non-farm payrolls averaging around 30,000 a month for a period, the unemployment rate north of 4% and average hourly earning growth rising around 3% y-o-y. There are some softening signs in leading US employment indicators but more are needed.
In terms of general US economic activity, there are slowing signs in housing in April. March housing starts, home building permits and existing home sales all fell by respectively 0.8% m-o-m, 8.8%, and 2.4% but not offsetting entirely strong gains in February. March retail sales fell by 1.0% m-o-m after falling 0.2% in February. Key leading indicators of manufacturing and non-manufacturing (service sector) also softened. The March ISM manufacturing purchasing managers’ index fell to 46.3 from 47.7 in February while the March non-manufacturing PMI fell to 51.2 (still an expansionary reading) from 55.1 in February.
In late March with swirling concerns about US banks barely contained the Fed hiked the Funds rate 25 basis points (bps) to 5.00%. According to the later minutes of the meeting some members wanted a pause. Subsequently, comments from senior Fed officials have turned in favour of more rate hikes ahead to contain inflation and it is likely that at the early-May policy meeting the Fed will hike another 25bps to 5.25%.
In China, economic releases in April show continuing recovery after the policy reversals away from restrictions late last year and early this year. GDP rose 2.2% q-o-q, 4.5% y-o-y in Q1 2023 marking China as the only major economy likely to experience accelerating economic growth this year. Further signs of accelerating growth show in March economic readings. March fixed asset investment spending is up 5.1% y-o-y, industrial production is up 3.0% y-o-y and retail sales are up 10.6% y-o-y, a sharp acceleration from 3.5% y-o-y in February. While the lift in retail sales in March marks strong revival in domestic spending in China, external demand is contributing to growth too. China’s export growth is up to +14.8% y-o-y in March, up sharply from -6.8% y-o-y in February. While China’s accelerating growth marks it apart from other major economies it is also exceptional in experiencing low inflation. China’s CPI is down 0.3% m-o-m in March taking annual inflation down to 0.7% y-o-y from 1.0% in February. Low inflation provides the Peoples’ Bank of China leeway to ease monetary conditions if needed.
In Europe, Q1 2023 GDP growth out later this week is likely to show growth around 0.2% q-o-q taking the annual growth rate down to around 1.2% y-o-y from 1.8% in Q4 2022. Essentially European economic growth is decelerating but not to the point that threatens recession in the immediate term. Leading economic indicators point to softer manufacturing activity with the April manufacturing PMI down to 45.5 from 47.3 in March but with the services PMI lifting to 56.6 in April from 55.0 in March. Europe’s inflation rate is declining. The March CPI is down to 6.9% y-o-y from 8.5% in February but the core CPI is sticky edging up to 5.7% from 5.6% in February. Europe’s labour market remains very tight with the unemployment rate at a quarter-century low 6.6% in both January and February. The European Central Bank hiked its deposit rate 50bps to 3.50% at its last policy meeting in March and is likely to hike again by at least 25bps at its next policy meeting in early May. The Bank of England is also under pressure to keep hiking after the 25bps hike in the base rate to 4.25% back in March. British CPI inflation is running above 10% y-o-y.
In Australia, economic indicators released in April have been mostly firmer than expected and point to the RBA needing to hike the cash rate further. The labour market remains very tight with another large employment gain in March, up 53,000, keeping the unemployment rate down at 3.5%, close to a half-century low. The risk is that with the unemployment rate staying so low annual wage growth will accelerate quickly from around 3% in late 2022 to above 4% by late 2023. Annual wage growth needs to be consistent with the RBA’s 2-3% inflation target, not where inflation has been. With persistently low unemployment the wage growth dial could move towards too much compensation for recent high inflation.
Australian annual inflation is past its peak with the February CPI down to 6.8% y-o-y from 7.4% in January and the Q1 2023 CPI out this week likely to show a decline in annual inflation to around 6.9% y-o-y from 7.8% in Q4 2022. Notwithstanding the declines inflation remains too high and underlying inflation readings are becoming stickier than headline inflation. The trimmed mean underlying measure out this week for Q1 is expected to decline only a little to 6.7% y-o-y from 6.9% in Q4 2022. Progress is likely to be slow getting inflation down with identifiable higher inflation factors ahead such as higher energy prices and housing rents making achieving the RBA’s 2-3% inflation target at least a two -or- three-year task. The task becomes greater if slowing growth in household spending does not continue.
In April, March retail spending rose 0.2% m-o-m after lifting 1.8% in February. April Westpac consumer sentiment rebounded 9.4% m-o-m, albeit from a low base. Business sentiment was strong in March according to the NAB business survey. House prices stopped falling in the major capital cities in March and instead have started to rise. Some of the buoyancy in the economic readings released in April may be down to the RBA deciding to pause at its early April policy meeting, but the RBA also made it plain that it was likely to return to hiking rates depending upon key economic readings.
Another event in April was the findings of the committee reviewing the operations of the Reserve Bank. Among the 51 recommendations for change that the Treasurer has promised to implement are the introduction of a new interest-rate setting committee that will meet less regularly than the current monthly schedule. There will be more commentary about interest rates from the new committee including frank airing of opposing views. It is still to be decided when the new arrangements will come in to effect plus the finer details. What will not change is the RBA’s 2-3% inflation target and that means no change to where the cash rate might peak ultimately or how long it will need to stay there.
The current monetary policy setting arrangements will still apply in May together with the RBA producing its usual quarterly Monetary Policy Statement the first Friday in May. We see the RBA reviewing the data over the past month and recognising that more needs to be done to get inflation back to target by mid-2025. We see the RBA hiking the cash rate 25bps to 3.85% at the early-May policy meeting and still indicating the possibility of a higher cash rate beyond.