Annual GDP growth improved unexpectedly in Q1 2019 in the world’s two biggest economies, the US and China presenting a challenge to the view that global economic growth is sliding in 2019. While the improvement in GDP growth is not universal in the few countries that have reported Q1 one emerging theme is that monthly economic readings for February and March have for the most part surprised on the strong side of market expectations. During April some of the potential downside risks to growth internationally have also become less concerning. Brexit has been pushed out pending further negotiations to the end of October. International trade negotiations between the US and China appear to be moving towards a deal. Providing the run of global economic readings continues to point to improving growth – and easier fiscal policy settings (including prospectively in Australia regardless of who wins the May 18th election) and stable to easier monetary conditions should support stronger growth – it is reasonable to expect analysts, including those in official agencies, to start upgrading global economic growth forecasts at least for 2019.
Turning to the US economy, the advance Q1 GDP reading at 3.2% annualised growth beat consensus forecasts by a percentage point and was up from 2.2% in Q4 2018. The strong result was a positive surprise especially as two big growth crimping factors affected the result, the prolonged shutdown of Federal Government agencies in February plus the worst winter weather in 40 years across a large area of the mid-western and eastern states. The components of GDP growth were mixed strength.
Annualised growth in US consumer spending at 1.1% in Q1 was down from 2.5% in Q4. Residential spending was weak, down 2.8%, while non-residential investment spending was relatively strong, up 2.7%. A little over half of the GDP growth rate came from the combined contributions of rising inventories (0.7 percentage point contribution) and net exports (1.0 percentage point contribution). Any concern about the comparatively modest growth in consumer spending and the fall in residential spending, however, is alleviated by signs of improvement in recent monthly readings of retail sales and new home sales.
March retail sales lifted by 1.6% m-o-m, more than erasing the 0.2% fall in February. New home sales rose in March by 4.5% m-o-m in March after lifting 5.9% in February. More importantly reasons for US households to spend freely continue to mount. Household income is being boosted by the strongest wage growth (more than 3% y-o-y) in a decade. The US unemployment rate at 3.8% is the lowest since the 1960s. Household wealth is again being boosted by the rising US sharemarket with the S&P 500 moving to a record high last week. Also, the Federal Reserve has indicated firmly that there will be no official interest rate hikes this year. Most likely US household spending will make a noticeably stronger contribution to Q2 GDP (due late July) than occurred in Q1 setting up the US economy to grow at more than 3% annualised pace through the first half of 2019.
In China, March and Q1 economic readings have almost all beaten expectations and seem to imply that growth is being boosted by the easier monetary and fiscal measures announced earlier in the year. Q1 GDP stabilized at 6.4% y-o-y the same as in Q4 and defying forecasts of a slowing growth rate. March economic readings were almost all noticeably stronger than expected. Exports rose 14.2% y-o-y after falling 20.8% y-o-y in February. March fixed asset investment spending accelerated to 6.3% y-o-y from 6.1% in February; industrial production lifted sharply to 8.5% y-o-y from 5.3% in February; and March retail sales rose by 8.7% y-o-y up from 8.2% in February. The shifting lunar New Year holidays may have had some influence on the rise in the monthly data in March relative to February. Nevertheless, purchasing manager reports from the manufacturing and services sectors less influenced by seasonal factors are also showing marked improvement over the last two months. China’s GDP growth looks set to hold at 6.4% y-o-y or better in Q2 (data due mid-July) confounding the early 2019 forecasts of most analysts looking for a dip in China’s growth rate. Forecasts of China’s economic growth rate are likely to be revised higher over the next few months.
The preliminary reading of Q1 European GDP is due out this week and is expected to show stable albeit low annual GDP growth at 1.1% y-o-y. While European Q1 GDP growth is not expected to show the early signs of revival evident in the US and China there are signs of improvement in some monthly European economic readings that hold the promise of better GDP growth in Q2. European retail sales were firm in February, up 0.4% m-o-m after lifting 0.9% in January. Unemployment is holding down at a decade low 7.8%. Budget spending is increasing in most European economies including most recently the concessions promised by French President Macron in response to the repeated weekend Paris yellow shirt protests. The threat of imminent economic disruption from a no-deal Brexit has been avoided by extending negotiations between Britain and the EU by six months. The European Central Bank has provided stronger indications that it stands ready to ease monetary conditions if needed.
In Australia, the dated but latest Q4 GDP growth disappointed rising only 0.2% q-o-q and lowering annual growth to 2.3% y-o-y from 2.8% in Q3. The more current Q1 CPI reading was also lower than expected coming in flat for the quarter and up only 1.3% y-o-y compared with 1.8% in Q4 2018 and now sitting well below the RBA’s 2-3% target band. The combination of weak real GDP growth and below-target inflation are promoting calls for the RBA to consider reducing its 1.50% official cash rate.
Set against those calls to lower the cash rate there is evidence that several areas of the economy are performing strongly. The labour market continues to strengthen. Employment rose more strongly than expected in March (+25,700) and is up 2.3% y-o-y. The unemployment rate at 5.0% in March is close to an 8-year low. Australia’s international trade continues to strengthen (a record $A4.8 billion trade surplus in March) aided by very strong growth in export prices, up 4.5% q-o-q in Q1 after increasing 4.4% in Q4 2018. Strong growth in Australia’s terms of trade (export prices relative to import prices) is driving upwards real net national disposable income and business profits at a much faster pace than real GDP growth. Business investment spending is rising and Government spending is lifting strongly too. There are also more signs that the downturn in housing activity and housing prices is starting to bottom.
Our view remains that the RBA is unlikely to cut the cash rate with so many signs starting to show that the global and local growth outlook has improved since their last policy meeting at the beginning of April. The approaching Federal election on the 18th May is also more likely to boost growth prospects later in 2019. Both the Coalition and Labor are committed to a near-term lift in the low-middle income tax rebate plus other measures providing a near-term boost to household disposable income and spending.