Global economic readings in June continued to indicate growth struggling to gain momentum with mildly improving economic activity in the US and Europe, but soft growth in China extending to Australia. Most regions and countries continue to pursue growth accommodating monetary conditions, although the US Federal Reserve is moving closer to starting to lift its Funds (cash) interest rate from zero. Towards month end the prospect of Greek default loomed large as the latest negotiations with its creditors appeared to fracture.
One important bright spot in the global economy is that the world’s biggest economy, the US, seems to be pulling out of the soft patch over the winter months. The final reading of Q1 GDP showed annualized growth at a weak -0.2%, but April and May economic readings have mostly firmed and are consistent with annualized GDP growth around 2.5% or better in Q2. US housing activity has taken a turn for the better with May existing and new home sales up respectively by 5.1% and 2.2%. Housing permits (the equivalent of Australian home building approvals) have been impressively strong, up by 11.8% in May after gaining 9.8% in Strong. In turn, US homebuilders have become optimistic and the June National Association of Homebuilders’ index jumped to 59 from 54 in May.
Encouragingly, US households are showing signs of spending more. Consumer sentiment ran close to the highest level in the current recovery at 96.1 in June, up from 90.7 in May and the expectations part of the survey were the highest in eleven years. Retail sales excluding automobiles, lifted by a stronger-than-expected 1.0% in May. Helping US consumers to spend more freely job security continues to improve and employment continues to rise. Non-farm payrolls rose by 280,000 in May after rising 221,000 in April. The unemployment rate lifted slightly in May to 5.5% but remains very close to an eight-year low.
The softest part of the US economy is manufacturing activity. Manufacturing purchasing manager index readings from various regions of the US have been mixed. May industrial production fell by 0.2% after falling 0.5% in April.
The US Federal Reserve continued to point to a first interest rate rise later in 2015 at its June policy meeting but also made it plain that the move would be dependent upon the run of US economic data showing sufficient strength to warrant a rate increase.
In China, economic readings remained quite weak. May industrial production rose by 6.1% y-o-y, better than the 5.9% reported in April, but still pointing to output growth languishing near a seven-year low. May retail sales rose by 10.1% y-o-y only edging up from 10.0% y-o-y in April, while May urban fixed asset investment spending slipped to 11.4% y-o-y from 12.0% y-o-y as the downturn in property development continues to weigh. The monthly economic readings are more consistent with 6.5% annual GDP growth rather than 7.0% being targeted by the authorities and registered in Q1 2015. China’s authorities continue to easy policies in response to weakening growth announcing an extensive urban housing renewal program and increased spending on transport links. The Peoples’ Bank of China over the weekend announced over the weekend further 25bps cuts to it 1-year lending and deposit rates to respectively 4.85% and 2.00%. The rate cuts were the fourth since November 2014 and more easing is likely if needed.
In Europe, economic readings have mostly continued to improve. April retail sales lifted by 0.7% and are up 2.2% y-o-y. Industrial production improved by 0.4% in April. The unemployment rate fell to 11.1% in April, the lowest rate in three years and with the German unemployment rate down to only 4.7%. Deflation has given ground to mild inflation, 0.3% y-o-y in May, and Europe’s international trade is booming showing a trade surplus of 24.3 billion euro in April up from 19.9 billion euro in March led by exports, up by 1.1% in April after increasing by 1.7% in March. The European Central Bank (ECB) is continuing and will continue to buy 60 billion euro of securities a month.
Amid the economic improvement in Europe a Greek tragedy is unfolding. Negotiations between Greece and its creditors are floundering prompting the ECB to suspend emergency payments to Greek Banks. Greek banks have been forced to close. Greece is unlikely to make a contractual payment to the IMF due on 30th June. Increasingly it seems that Greece may fall out of the euro common currency, a source of uncertainty in Europe and reinforcing the economic depression in Greece itself. Given that Greek default will mostly impact international government institutions such as the IMF, ECB and European Union, the funding and recapitalizing of those institutions will partly influence the broader economic ramifications of the heightened Greek problem. Most likely central banks everywhere will pursue more accommodating conditions than otherwise would have been the case to provide a cushion against untoward disruption.
In Australia, the slow growth theme continued through June. Q1 GDP released early in the month showed annual growth slowing to 2.3% y-o-y from 2.5% in Q4 2014. The GDP growth outcome was better than expected but masked worryingly soft components. Real net national disposable income slowed to -0.2% y-o-y while domestic demand grew only 0.8% y-o-y and dependent mostly on households running down their savings. April and May economic readings providing a hint of what growth might look like in Q2 were a mix of weak and strong. On the softer side, April retail sales were flat, April home building approvals fell by 4.4% (albeit from a high level the month before) and the April trade position worsened sharply to a deficit of -$A3.9 billion from -$A1.2 billion in March.
On the firm side, April home loans were up strongly by 2.9% in value with the value of owner-occupier loans up by 3.1% and investor loans up by 2.6%. Housing activity is the strong edge of the economy, but the boom in home sales is becoming more confined to Sydney. Q1 2015 house prices rose by 1.6% q-o-q and 6.9% y-o-y, but led by Sydney up 3.1% q-o-q and 13.1% y-o-y. All other state and territory capital cities showed house price change of 0.7% q-o-q or less and with prices actually falling in Perth and Darwin. Employment growth was also surprisingly strong in May, up by 42,000, and causing the unemployment rate to recede to 6.0% from 6.1% in April. Detailed employment data seems to indicate that lower-paid occupations are leading employment gains.
The RBA left its cash rate unchanged at 2.00% at its June policy meeting but made it plain that if demand in the economy needs more support it is open to reducing the cash rate further. Both Treasury and the RBA worried aloud about excessive house price increases in Sydney, but recognise it is a problem fairly much isolated to Sydney. Our view remains that the softness of Australian domestic spending will lead the RBA to cut the cash rate further. August remains the most likely time for the next rate cut after release late in July of the Q2 CPI confirming very low inflation. Depending upon how issues surrounding the Greek debt crisis unfold over the next week there is an outside possibility that the RBA may cut the cash rate to 1.75% at the July policy meeting.