Global economic readings continued to run on balance softer than widely expected through much of January adding to concerns about a potential global economic slowdown in 2016. Weaker commodity prices, including the price of oil down to a 12-year low at one point, and the worst start to a calendar year on record for global share markets reinforced a sense that global economic growth may be faltering. While there were some soft data points during the month, however, they were consistent with moderating growth, rather than unduly weak economic activity. In Australia, economic readings were comparatively firm on balance, to the point where it seems likely that the RBA will continue to keep its cash rate on hold at 2.00% for another few months.
In the United States economic readings released so far this month present a mixed picture. Most indicators relating to the manufacturing sector have taken a turn for the weaker. December industrial production fell by 0.4%, while the December ISM manufacturing survey reading fell further below the 50 expansion/contraction line to 48.2 from 48.6 in November. Set against the weakness in US manufacturing, non-manufacturing or services sector activity remained comparatively robust on the basis of the December ISM survey – a reading of 55.3, down only a little from 55.9 in November.
In terms of spending in the US economy, retail sales have been disappointing, flat in December after lifting only 0.2% in November, yet consumer confidence and borrowing have been quite strong. Housing activity has been volatile month-to-month, although December existing home sales were very strong, up 14.7% in the month, while housing starts and permits in December down respectively 2.5% and 3.9% held much of the near 11% gains in both back in November. Employment remains very strong with non-farm payrolls lifting in December by 292,000 after an upwardly revised 252,000 lift in November. US inflation remains subdued with December producer prices down 0.2% in the months and the CPI down 0.1%. With the US economy growing only modestly and with little sign of inflation the Federal Reserve seems likely to progress very cautiously lifting the Federal funds rate. After a first hike back in December, a “no change” decision seems likely at the policy meeting this week with perhaps another rate hike at the March policy meeting, data permitting.
In China, despite concerns that the rebalancing of the economy away from foreign trade, investment spending and manufacturing as chief economic growth drivers moving towards more retail spending and services sector activity might be going awry, the data released over the past month point to respectable growth and with contributions along the lines favoured by China’s Government. Q4 GDP rose 6.8% y-o-y and for the whole of 2015 GDP was up by 6.9% after lifting 7.3% in 2014, a slowdown but not an unduly pronounced one. The tertiary or services sector, moreover, showed signs of taking over the growth lead lifting 8.3% in 2015, up from 7.8% in 2014. The moves by the authorities adjusting down the yuan exchange rate and intervening occasionally in the share market were in the spotlight and at times lacked finesse adding to market uncertainty. These issues seem likely to settle over time given annual economic growth stabilizing in 6%+ territory and still the undoubted capability to use the main macroeconomic policy levers – easier monetary policy and more budget spending if needed.
In Europe, the data reports released in January were mixed-strength. On the positive side, the December business and consumer survey lifted to 106.8 from 106.1 in November while Europe’s unemployment rate fell unexpectedly to 10.5% in December from 10.6% in November. On the negative side, November retail sales fell by 0.3% after falling 0.2% in October and November industrial production fell by 0.7% almost reversing a 0.8% gain in October. The minutes of the ECB’s December policy meeting were less than encouraging too showing divisions among the members explaining why the policy easing at that meeting was effectively a compromise failing to live up to pre-meeting guidance from ECB President Draghi. Interestingly the ECB policy meeting held last week made no policy change but is again providing guidance that policy will be “revisited” – read eased – at the next meeting in March.
In Australia, the economic readings released so far in January have been comparatively firm, but with the notable exception of November home building approvals that fell sharply by 12.7% driven by a particularly large fall in approvals for private multi-occupancy dwellings in Victoria. Signs are accumulating that the home buying and building boom has topped out.
On the positive side, household consumption spending seemed to strengthen in Q4. Retail sales rose by 0.4% in November after lifting by 0.6% in October. November international trade was stronger than expected too with the trade deficit narrowing to $A2.9 billion from $A3.2 billion in October assisted by a 1% lift in exports. The biggest positive is the resilience of employment falling by only 1,000 in December after lifting 75,000 in November. The unemployment rate was steady at 5.8% in December. Importantly job vacancies continue to rise strongly, up 3.5% in Q4 and up 11.8% y-o-y, the best annual gain in almost 4 years and a sign that employment may continue to grow reasonably well early in 2016.
The RBA board meets for the first time in two months on February 2nd. Going back to early December when the RBA board met last time the view of the board was that although inflation was low and the economy continued to grow below potential there were signs that activity would improve over time. The data released over the past two months remains consistent with that view so it seems unlikely that the RBA will adjust the 2.00% cash rate in the near term. We still see soft global and local economic conditions leading the RBA to cut the cash rate further, but not ahead of the May policy meeting. We continue to pencil in two 25bps cash rate cuts in May and June this year taking the cash rate down to 1.50% in the second half of 2016.