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Our monthly roundup of global and local economic data and events indicates some deceleration in global growth at the turn of the year, most likely temporary being in large part the result of severe winter weather conditions in the United States that will pass. Importantly, government policies that in key countries and regions have restrained economic growth over the past year and more are on the brink of changing and becoming more growth friendly. In the United States, budget contraction is much less pronounced in the current fiscal year. In Europe, austerity government policies are giving ground to more growth friendly budgetary policies. Adding to the changing, more growth friendly government policy theme, the weekend meeting of G20 finance ministers and central bankers held in Sydney has pledged to adopt member country policies consistent with global growth running two percentage points higher over the next five years than growth generated by current policy settings.
Against this backdrop of an internationally coordinated shift to more accommodative government economic policies, the usual rebound in growth that occurs after severe weather events seems even more assured, a comforting proposition given the big dent the polar vortex weather event in the US has put in the recovery in US housing and manufacturing activity. US housing starts in January took the biggest pummeling in January falling by 16% extending to a sharp fall in confidence in the homebuilding sector. The February National Association of Homebuilders’ index fell in February by a record 10 points to 46. The various Fed manufacturing business surveys have fallen more than expected in February as well with the most notable decline the Philadelphia Fed survey reading collapsing to -6.3 from +9.4 in January. The moderate recovery in US employment through almost all of 2013 also lost some puff in December and January with non-farm payrolls up respectively 75,000 and 113,000 set against earlier monthly gains averaging nearer 200,000.
Nevertheless, the Federal Reserve remains confident about the US economic recovery to the point where it continued to taper its asset purchases at its late January policy meeting and promised more of the same at its coming six-weekly policy meetings. Across the Atlantic, with the notable exception of flood-affected Britain, Europe’s slow economic recovery has continued and at slightly greater pace than expected with region-wide GDP growth of 0.3% q-o-q in Q4 2013. In China, business sentiment indicators have softened as the authorities continue to work to tame rising property prices. Equally, the authorities have reconfirmed this weekend their confidence that annual growth will stay in 7-8% and monthly economic readings of credit, exports, retail trade, urban investment and industrial production are consistent with growth continuing to run in Q1 2014 close to the 7.7% y-o-y clip recorded in Q4 2013.
In Australia, housing activity, retail sales and exports have all strengthened, but not sufficiently yet to lift GDP growth back to long-term potential above 3.0% y-o-y. As a result, the labour market that always lags changes in economic growth has remained soft with almost no growth in employment over the 12 months to the end of January 2014. One consequence is that the unemployment rate has drifted upwards from 5.4% in January 2013 to 6.0% in January 2014. Wages growth is very low too, up only 2.6% y-o-y in 2013, the lowest annual wages growth in more than a decade. The household sector is being buffeted by conflicting influences – uncertain job and income prospects, but very strong growth in household wealth (house prices rose 9.3% y-o-y in 2013 and the ASX 200 is currently still up nearly 15% over the past 12 months), as well as stable, very low borrowing interest rates providing strong temptation to save less at the margin and spend more.
Even though consumer sentiment, as measured by the monthly Westpac- Melbourne Institute’s survey has weakened over recent months, there are abundant signs that the forces influencing the household sector to spend more are dominating. The value of owner-occupier housing finance commitments was up 19.4% y-o-y in December with investor housing finance commitments up 40.7%. Retail sales have risen strongly in October, November and December and are up over Q4 2013 by 0.9% q-o-q after taking account of inflation. This strength in household spending has helped to sustain stronger business confidence which in turn should lead to improving employment and better business investment spending outside the mining sector.
One industry that looks set to be much stronger in 2014 than in 2013 is homebuilding. Home building approvals are up 21.8% y-o-y in December 2013 led by strength in states such as Queensland and New South Wales where home building activity has run well short of potential demand for new housing from rising population for some years. Population growth is also running at its strongest pace in over 20 years, up 1.8%, or 407,000 people, in 2012-13 with a particularly strong contribution from net migration, 244,400 people.
There are still potential headwinds to Australian growth from the approaching reduction in mining investment spending and possibly a tough Federal Government budget in May. On balance, however, December and January economic indicators point to accelerating economic growth. The inflection point between softening and improving growth may have been back in Q4 2013. If this is the case, the Q4 2013 GDP growth reading due on 5th March, should show improvement on 0.6% q-o-q, 2.3% y-o-y growth reported for Q3 2013.
Finally there is the curious case of higher than expected inflation in Q4 2013. The CPI rose by 0.8% q-o-q, 2.7% y-o-y while the two main underlying inflation readings were each up 0.9% q-o-q, 2.6% y-o-y. The Reserve Bank has responded to the higher inflation readings by lifting its near-term inflation forecasts through 2014 a little above 3% but with inflation falling back inside 2-3% band in 2015 and beyond. The RBA believes it is unlikely given low wages growth that inflation will stay high for too long. Our view remains that inflation may prove to be stickier than the RBA is allowing, but that it will be several months before the RBA considers responding by starting to lift the cash rate. In the meantime, risk assets including credit look relatively well supported by a happy combination of slowly improving growth, a more competitive Australian dollar exchange rate and persistently low interest rates.