Global economic readings were mixed-strength in February, but still point on balance to growth losing momentum. The continuing volatility in global financial markets and weakness in some commodity prices, especially oil, still highlight the possibility of very weak global economic conditions ahead, an issue starting to influence the decisions of central banks. In Australia, economic readings seem to show relative strength in the non-resources parts of the economy countering the negative impact of weak commodity prices and big falls continuing in mining investment spending. The RBA held the cash rate unchanged at 2.00% at its first policy meeting for 2016, is comparatively upbeat about the Australian economy, but because of continuing low inflation has the capacity to lower the cash rate should demand in the economy show signs of weakening.
In the United States economic readings released in February showed soft GDP growth in Q4, 1.0% annualized growth down from 2.2% in Q3, but January readings have taken a mostly stronger turn, including previously soft manufacturing readings. January industrial production lifted by 0.9% m-o-m while January durable goods orders were much stronger than expected, up 4.9% m-o-m. Housing activity indicators presented a more mixed-strength picture in January with existing home sales up 0.4%, consolidating a very strong 12.1% gain in December; new home sales down by 9.2% m-o-m; and housing starts down by 3.8%. Personal consumption spending, however, showed a strong gain in January, up by 0.5% m-o-m, after lifting 0.1% in December. The US economy seems on balance to have gained a little growth momentum in January, notwithstanding financial market volatility.
The all-important US labour market was like most other indicators a mixed bag in January. Non-farm payrolls growth was softer, up 151,000 compared with a revised 262,000 gain in December, but the unemployment rate edged lower to 4.9% from 5.0% in December. There was also a sign of wages pressure developing in the average hourly earnings reading, up 0.5% m-o-m. A flicker of life also showed in other US inflation readings in January. Producer prices lifted unexpectedly by 0.1% m-o-m (0.4% excluding food and energy prices). The core reading of the CPI, excluding food and energy prices, was up 0.3% m-o-m, 2.2% y-o-y, more than widely expected. The mid-February semi-annual monetary policy testimony by Fed Chair Janet Yellen, implied that that the potential negative economic consequences from financial market volatility may delay the Fed’s plans to normalize interest rates, but more recent signs showing the possible beginnings of inflation pressure throw the issue of when or if the Fed may lift rates again back in to the melting pot.
In China, lunar New Year celebrations limited the range of economic readings produced relating to January. Those that were released presented a mixed picture. January purchasing manager survey readings for the manufacturing sector continued to languish below the 50 expansion/contraction benchmark while the official services sector PMI fell to 53.5 from 54.4 in December. January exports, -11.2% y-o-y, and imports, -18.8% y-o-y were both much worse than expected pointing to weaker economic activity. In contrast, loan growth jumped to 15.3% y-o-y from 14.3% y-o-y in December and early reports of retail spending in the New Year holiday week seem quite strong. The jury is out on whether slowing growth in China is starting to base out, awaiting the combined January/February readings of retail sales, industrial production and urban fixed investment spending all due in mid-March.
In Europe, Q4 GDP rose by 0.3% q-o-q, 1.5% y-o-y virtually the same as the result as in Q3 2015 and showing that Europe is continuing to struggle to grow. Growth is very mixed among the various euro-area economies ranging from recession in Finland and Greece to strong growth 1%+ q-o-q in Estonia and Slovakia. Three of the big-four euro-area economies Germany, France and Italy are growing only modestly between 0.1% q-o-q and 0.3% q-o-q while the news continues to improve for previous problem economy, Spain growing strongly again by 0.8% q-o-q. European banks came under selling pressure at times during the month causing ECB President Draghi to state that the ECB was prepared to take further action to ensure that financial market volatility would not compromise the safety of European banks. ECB guidance has fostered a view in markets that monetary policy will be eased again at the next ECB policy meeting in March.
In Australia, the economic readings released in February have been very mixed. Home building approvals rebounded strongly by 9.2% in December after falling 12.4% in November. Retail sales, in contrast were surprisingly soft in December, 0.0% change after lifting 0.4% in November. The monthly trade deficit also worsened sharply in December to $A3.5 billion from $A2.7 billion in November driven mostly by a 4.7% m-o-m fall in exports. After two exceptionally strong gains in employment back in October and November, employment fell in December (-800) and again in January (-7,900). The unemployment rate that fell through 2015 to 5.8% in December, unexpectedly rebounded to 6.0% in January.
On the positive side, consumer sentiment has strengthened and business sentiment has held up reasonably well too. The RBA both in its February policy meeting and in its quarterly monetary policy statement has taken a reasonably upbeat view of what signs there are of improvement in the non-resources parts of the economy. While recognising the volatility in global financial markets the RBA wants to wait and see what impact if any there will be on Australian real economic activity. The RBA continues to note that inflation is likely to stay low for the next year or two affording it the capacity to lower rates should demand weaken.
Our view remains that the risks to Australia’s growth rate remain skewed to the downside. We see the RBA cutting the cash rate further, probably in May and June taking the cash rate down to 1.50% in the second half of 2016. Even with further cash rate cuts bank lending interest rates may not fall, but at least they will not rise, an increasing risk as funding pressure on banks continues to rise.