For a more comprehensive roundup of the week, listen to Stephen’s full report here.
In January international agencies such as the OECD and World Bank downgraded their 2015 global growth forecasts to 3.5% and 3.0% respectively, mostly because of continuing soft European growth and concern about the impact of lower commodity prices on developing country producers. Interestingly both agencies upgraded their 2015 growth forecasts for the world’s biggest economy the United States, making the downgrades for global growth a little quirky.
Data releases during January pointed to continuing strong economic growth in the US, stabilising growth in world’s second biggest economy China, but still soft growth in Europe. Australian economic readings were mostly stronger than expected. Commodity prices, however, continued to tumble, inflation was low almost everywhere and Europe slipped in to deflation. In Europe, the European Central Bank announced a substantial asset buying program, but Greece elected a Government committed to ending austerity programs while trying to remain in the euro common currency club.
US economic readings released in January presented a mixed bag, but were still consistent with continuing above-trend economic growth. Employment growth remained very strong with non-farm payrolls up by a greater-than-expected 252,000 in December after an upwardly revised 353,000 increase in November. The unemployment rate fell to 5.6% in December, the lowest reading since early 2007, from 5.8% in November. Q3 GDP growth was revised upwards to 5.0% annualised growth from 3.9%. US households became more optimistic about their spending plans and the preliminary January reading of consumer sentiment lifted sharply to 98.2, the strongest reading since January 2004. Other monthly economic readings presented more of a mixed-strength economic picture. December retail sales fell more than expected by 0.9% while industrial production fell by 0.1%. Housing activity in contrast was firm in December with housing starts up by 4.4% and existing home sales up 2.4%.
The minutes of the US Federal Reserve’s late December policy meeting showed considerable discussion at the meeting about the timing of the Fed’s first interest rate increase. At the meeting the wording guidance concerning the first interest hike changed from “a considerable time” after the October 2014 ending of QE to the Fed will be “patient” before lifting the Funds rate. Fed Chairman, Janet Yellen, later explained that the wording implied no Fed policy action at either the January or March 2015 policy meetings and the minutes of the meeting indicate a broad consensus among the committee members that no rate increase was likely before the April 2015 policy meeting.
In China, economic growth appears to have consolidated, possibly even improved a little on the basis of data releases through January. Annual GDP growth was unchanged at 7.3% y-o-y in Q4 against analysts’ expectations of small slippage to 7.2%. December monthly readings were mostly stronger than expected with annual export growth lifting to 9.7% y-o-y from 4.7% in November; industrial production up to 7.9% y-o-y from 7.2%; and retail sales up to 11.9% y-o-y from 11.7% in November. The housing slowdown in China continued to weigh on urban fixed asset investment, 15.7% y-o-y from 15.8% in November, but the negative impact was mostly out-weighed by rising public infrastructure spending on selected urbanisation projects. The People’s Bank of China is also in a position to loosen monetary policy further after December CPI inflation came in at 1.5% y-o-y well below the PBOC’s 3.5% target.
In Europe the issue of whether the European Central Bank would take strong action to counter weak growth and deflation risk came to a head when EU inflation printed at -0.2% y-o-y in December, down from +0.3% in November. Other economic readings mostly showed minor improvement in European economic conditions in late 2014. November retail sales rose by 0.6% after a similar increase in October while industrial production was up by 0.2% in November after a 0.3% increase in October. Nevertheless, the increasing risk that deflation thinking might take hold among European households and businesses forced the hand of the ECB and it announced 60 billion euro of asset purchases per month from March 2015 through to September 2016 with much of the risk from the sovereign debt purchasing component to be taken by member country central banks.
Another issue in Europe is the Greek election which took place over the weekend. As expected it resulted in the election of a government wanting to stop austerity programs associated with bail-out loan provisions, but still stay with euro currency. The result probably heralds more turmoil in discussions about Greece, but is also somewhat defused by the ECB’s QE announcement.
In Australia, despite the overhanging shadow of economic prospects from falling export prices and declining national income, most economic data released in January were surprisingly firm. Job vacancies have been growing for some time. The December ANZ job advertisements series rose by 1.8%, its seventh consecutive monthly increase. The Australian Statistician’s job vacancies series rose by 2.6% in the three months to November and to their strongest level in two years. Employment rose in December by 37,400 the second consecutive much-stronger-than-expected monthly outcome and the unemployment rate unexpectedly declined to 6.1% in December from a downwardly revised 6.2% in November. Unemployment rates are now below their peak 2014 monthly readings, well below in some cases, in every state except Western Australia, yet common perception is that the opposite is the case.
Other positive Australian data standouts were November international trade showing a deficit of $A925 million, much smaller than the consensus analysts’ forecast of $A 1,600 million deficit. The surprise was the resilience of the value of exports, up 0.6% in the month and in the face of collapsing export prices. Home building approvals were also much stronger than expected in November, up by 7.5% after increasing 11.5% in October. Home building approvals rose above 18,000 for the first time ever to 18,245 providing promise of considerable strength in home building activity through 2015.
The RBA board, as is customary did not meet in January. The first meeting of 2015 will be on Tuesday 3rd February. The release of the Q4 CPI is due tomorrow and is likely to show a low headline annual inflation reading below 2.0% y-o-y in addition to low underlying annual inflation readings. The RBA is likely to revise down its inflation forecasts in February and the current 2.50% cash rate is starting to look too high relative to the inflation outlook and relative to very low official rates overseas. The likelihood has increased that the RBA may reduce the cash rate in February, a move, which if it occurs may help to prevent Australian economic growth, weighed by falling national income, travelling below long-term trend for too long.