Global economic growth signals are looking a little more mixed through May. There are still regions where economic readings are surprising positively such as much of Europe and some developing economies elsewhere. China and the USA, the world’s two biggest economies, however, have registered mostly weaker than expected economic readings through May, probably because of temporary factors, but possibly a first hint of weaker growth to come. As far as the US is concerned, the Federal Reserve still warns that the US economy is operating at capacity and that the prudent policy course is to continue lifting slowly the Federal funds rate. A complicating factor remains President Trump’s proposed tax-cutting and budget spending boost which if they manage to run the gauntlet of Congressional scrutiny over the next few months could add a strong second wind to the ageing US economic recovery and the outlook for US interest rates and interest rates elsewhere internationally too.

In the US, the softer turn in the economy was confirmed with the release of Q1 GDP showing initially only 0.7% annualised growth, compared with 2.1% reported in Q4 2016. The second estimate of Q1 GDP provided an upward revision to 1.2% annualised growth with much of the revision coming from an upgrade of consumer spending growth, but still to only 0.6% annualised. The comparative weakness of consumer spending in Q1 has been attributed in part to severe winter weather persisting longer than usual and is at odds with elevated readings of consumer sentiment and confidence as well as evidence of rising household income and wealth. A rebound was expected in April retail trade but it turned out to be less pronounced than expected, up only 0.3% m-o-m, after excluding automobile sales. Housing activity has taken a noticeably weaker turn in April, notwithstanding strong home builder survey readings. New home sales fell in April by a much-greater-than-expected 11.4% m-o-m, while existing home sales disappointed too falling by 2.3%.

While there have been signs of soft household spending continuing early in Q2, employment growth has rebounded from its Q1 soft patch and by more than expected. Non-farm payrolls rose by 211,000 in April, compared with a gain of 79,000 in March. The US unemployment rate fell to a decade-low 4.4% in April and average hourly earnings rose by 0.3% m-o-m. Weekly initial jobless claims have been running close to their lowest (strongest) readings since the survey started in 1971 and the six-weekly Fed Beige Book report covering conditions in the twelve separate Federal Reserve districts speaks of almost general tight labour market conditions with upward pressure on wages. The Federal Reserve is caught between many stools – signs of a soft patch in the US economy, but one that may not last; evidence that the economy has little spare capacity and is operating close to functional full-employment; a need to normalise interest rates and the Fed’s balance sheet while conditions permit; and a set of fiscal promises from President Trump that could boost or cruel economic growth depending upon what Congress allows to pass. The path of least regret for the Fed still seems to be to lift slowly its funds rate with the next instalment likely on June 14th taking the rate up another 25bps to 1.25%.

In China, April economic readings almost all came in weaker than expected and showing deceleration from March. Exports rose by 8.0% y-o-y, down from 16.4% in March and imports were up 11.9% y-o-y from 20.3% in March. Urban fixed asset investment spending, the mainstay of China’s economic growth, rose 8.9% in April, down from 9.2% in March. April industrial production showed a pronounced deceleration to 6.5% y-o-y in April from 7.6% in March and the part of China’s economy that the authorities want to see improve as part of its efforts to rebalance economic drivers, retail sales, decelerated to 10.7% y-o-y in April from 10.9% in March. The softer edge to China’s economic data is unsurprising as it reflects the policy efforts of the Peoples’ Bank of China and its series of small steps tightening monetary conditions this year. Essentially, China’s stated intention to maintain economic growth around 6.5% y-o-y or higher is incompatible in the near-term with a pressing need to contain residential construction and speculation as well as slow and reform bank and non-bank lending. The risk is that China’s economic growth rate could slow by more than expected, but the authorities are well-positioned to lift government spending if that starts to occur.

Europe consolidated its improving economic position in May. Q1 GDP was relatively strong, up by 0.5% q-o-q and 1.7% y-o-y with particularly encouraging growth at the heart of the European economy in Germany with GDP up 0.6% q-o-q. Several smaller Eastern European economies registered GDP growth well above 1.0% q-o-q in Q1 and as a group are becoming one of the fastest growing regions in the world. The great promise that is starting to show in Europe is that it can grow without running in to capacity constraints. Europe’s unemployment rate of 9.5% has improved and is the lowest it has been in 8 years, but it has room to fall much further without presenting higher inflation risk. As a result, the European Central Bank is still in a position to maintain very growth accommodating monetary policy for some time ahead. Europe still has problems including questions about excessive government debt, weak banks and whether the European Union and the euro currency can survive, but better economic growth prospects reduces the risk of any those problems becoming acute.

The Australian economy continued to show signs of resilience and weakness in May and is starting to spawn a split in views about the growth outlook and the outlook for interest rates. On the stronger side business conditions and confidence are firm; employment growth blipped higher in March, +60,000, and April, +37,400; the unemployment rate came down in April to 5.7% from 5.9% in March; exports are growing, up 2% in March; and home buying activity has stayed relatively robust. Among the positive influences in May, the Government’s 2017-18 Budget was relatively well received too although the limited change in the forecast underlying budget position relative to earlier forecasts means it will not directly add to economic growth prospects over the next year or so.

On the weaker side of the economic growth ledger, even though home buying activity is just about holding up, home building activity is falling sharply. Home building approvals fell by 13.4% in March and are now down by 19.9% y-o-y. Home building construction fell in Q1 by 4.7% q-o-q. Retail sales were unusually weak in Q1 falling by 0.1% q-o-q after increasing by 0.7% in Q4 2016. Wages growth continued to languish at 1.9% y-o-y in Q1 and slipped below the annual CPI change of 2.1% y-o-y in the same quarter. The data released in May provided a sense that the household sector is struggling to meet the servicing of record high household debt and may be starting to limit its retail spending to make ends meet.

For the time being the RBA is still inclined to see positive economic growth factors winning out over time, although it recognises that there are downside risks too. If the economy slowly picks up pace, at some point wages and inflation will rise and the RBA will lift interest rates. If, however, the negative economic growth forces win out, the RBA will lower its growth forecasts and it could cut the cash rate further. At this point the data to hand are far from sufficient to prove the case for either the stronger or weaker economic growth forecasts which implies the RBA holding the cash rate unchanged at 1.50% for several more months to come. Our forecast remains that the RBA will lift the cash rate eventually in Q1 2018 by 25bps to 1.75%, but like the RBA we are watching developments and concede that downside risks to Australia’s economic growth outlook are not as remote as they were a few months ago.