Stronger economic growth momentum continues to build around the world. Unless tempered by a hit to spending confidence from the likes of higher interest rates, government budget cuts, or a reduction in wealth, stronger economic growth tends to build on itself. Stronger economic growth feeds more domestic and international demand which in turn pushes growth and demand higher. Keeping monetary conditions easy tends to add fuel to economic growth as too does easier government fiscal policy. Even in economies that have been growing strongly for some time such as the United States policy settings are still priming more growth. As a result, global economic growth continues to gather pace and there is little reason to expect the situation to change this year.
In the United States annual economic growth is well established close to 3% and appears to be accelerating. Inflation is running around 2% – a touch above for the headline CPI and a touch below for the core CPI excluding volatile food and energy prices. Annual wages growth and producer prices are running closer to 3% y-o-y indicating higher CPI readings ahead. Amid these signs that the US economy is running close to capacity and is probably starting to prime higher inflation the Fed has continued to move its Fed funds rate at very sedate pace away from the post-GFC emergency low of zero.
Six 25bps rate hikes spread over more than two years have taken the funds rate to 1.50%, but because inflation has risen over that period too the real funds rate is -0.6%, meaning that the stance of monetary policy is very expansionary. US budgetary policy is moving to more expansionary setting too. Most estimates place the impact of the legislated tax cuts at around a 0.3 percentage points addition to the already strong expected US economic growth rate this year.
In China, interest rate changes by the Peoples’ Bank of China have been modest in scale and regional infrastructure spending plans are turning budgetary policy setting expansionary. In Japan, the reappointment of Bank of Japan Governor Kuroda seems to promise zero official interest rates plus continuing quantitative easing for the next year or two at least. Yet Japan’s economy has been growing more consistently recently.
In Europe, annual GDP growth has picked up momentum over the past year and is running above trend around 2.7%. Headline and underlying inflation are hovering around 1%, but the ECB’s deposit rate has been held at its emergency low point of -0.40% (-1.40% in real terms) with every indication from the ECB that the rate will not be raised this year.
In Australia, the RBA is steadfastly sitting on its emergency low 1.50% cash rate established after the last 25bps rate cut in August 2016. Since that period annual GDP growth has lifted modestly to 2.8% while annual CPI inflation has risen from 1% to 1.9%. The cash rate is expansionary (-0.4% in real terms) and government budgetary policy seems set to provide modest stimulus too with tax cuts heralded in the May Budget.
Staying with the Australian outlook stronger growth momentum factors include stronger global economic growth, stimulus from easy monetary conditions and potential stimulus in the wings from budget tax cuts. Potential growth headwinds may arise from weaker housing activity and house prices cutting in to household wealth. Low wages growth is a potential constraint too. These constraints, however, seem unlikely to win over the forces driving stronger growth.
Growth momentum is likely to continue while central banks and now some governments keep adding fuel to the economic growth fire. In the US the Fed may turn off the fuel tap in the first half of 2019 if it delivers as its guidance implies another three 25bps of rate hikes this year and another early in 2019. In Australia, the monetary policy fuel tap looks set to remain on full power for the next 6 months at least and even once the RBA starts to lift rates it is unlikely that the cash rate will be lifted enough to start limiting growth prospects until late 2019.
The bottom line is that it is reasonable to expect global and Australian economic growth to build momentum through 2018 because central banks and governments are on balance likely to be adding fuel.