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Our monthly roundup of global and local economic data and events indicates a more mixed-strength economic picture than in May. Winter-weather damage to the US economy was more severe in Q1 than recognized previously, but the recovery since appears more pronounced than thought likely earlier. The slow-down in the pace of economic growth in China appears to be basing, but the unwinding of excesses in the residential property seem likely to present a protracted headwind to growth. In Europe, the economic recovery remains fragile, although some important economies such as Germany and the United Kingdom are performing relatively well. The European Central Bank showed that it is prepared to respond to the soft outlook and eased its policy settings at its June meeting including lowering its deposit rate to -0.10%. Concerns about developments in the Ukraine took a back seat as a rising threat to stability in Iraq and the Middle East took hold with some potential to elevate oil prices.

In Australia, economic growth in Q1 was stronger than expected driven predominantly by rising exports, but the strength evident in retail sales, home building approvals and employment early in the year appears to fading. The RBA continued to make it plain that the already quite protracted period of the cash rate sitting on a very low 2.50% will extend for several more months at least.

Returning to the international economy, a highlight has been the signs of improvement in the US economy. Leading economic indicators of US manufacturing activity have been especially strong. The recently released June Empire (New York) State survey after jumping to 19.01 in May, well above the expansion/ contraction threshold of zero, sustained the strength in June with a reading of 19.28. Further down the US Eastern Seaboard, the Philadelphia Fed index lifted to 17.8 from 15.4, another very strong reading. April durable goods orders consolidated a huge 3.6% gain in March by lifting a further 0.8% in April and May industrial production lifted by 0.6%.

Manufacturing is expanding in all twelve regions covered in the Fed’s monthly Beige Book in a rare uniform show of strength. The Beige Book also noted that consumption spending is expanding in all 12 districts too. The official retail sales reading was firm in May, up by 0.3% after increasing by 0.5% in April. US housing is showing some signs of renewed growth too with the June National Association of Homebuilders’ Index lifting to 49 from 45. Importantly, employment continued to rise in the US with non-farm payrolls up 217,000 in May after increasing 282,000 in April. The unemployment rate was steady at 6.3% in May and although it has fallen sharply over the past year the Federal Reserve (Fed) still sees substantial slack in the US labour market. The Fed continues its orderly winding back of asset purchases (QE) cutting another $US10 billion from its monthly purchases to $US35 billion at its latest meeting, but continues to reassure that the zero Fed funds interest rate will remain in place for some time to come.

In China, May economic readings were consistent with an economy growing around the official target of 7.5%, but also an economy rebalancing the way the authorities would like, in favour of stronger consumption spending – retail sales accelerated to 12.5% yoy in May from 11.9% in April – but with less strong growth in urban fixed asset investment – edging back to 17.2% in May from 17.3% in April. Residential property construction and price speculation is abating and will likely slow for the next year or two as excess supply of residential property is reduced. Just as the authorities contributed by their policy actions over recent years to causing the residential property market to peak, they are also likely to be involved in the unwinding to ensure it does not become disorderly or unduly damage overall growth prospects. Already, the Peoples’ Bank of China is showing that it is prepared to reduce selectively bank lending restrictions and ratio requirements.

In Europe, the most positive developments have been low government bond yields, in some cases down to a third or less of where they were a year ago, the edging down of the unemployment rate to 11.7% in May (the number of people unemployed in the euro-area has fallen more than 450,000 over the past 12 months) and early signs of success for the harsh regime of economic reform in countries such as Ireland and Spain. The willingness of the ECB to ease policy to limit the risk of deflation and to try and encourage banks to lend is also positive. On a more negative note, growth is struggling to gain momentum in the euro-area as a whole although some constituent economies – importantly Germany – are doing well. Skeptics to the idea of one Europe are also in the ascendancy in the European Parliament after recent elections and more disturbingly some are ultra-nationalistic.

In Australia, the very promising signs of stronger economic growth earlier in the year are showing signs of fading. GDP growth in Q1 was stronger than expected at 1.1% in the quarter elevating annual economic growth to 3.5% yoy from 2.7% in Q4 2013. Net exports provided a major contribution to growth in the quarter (1.4 percentage points) reflecting the transition from investment in mining projects to exports from enhanced mining capacity. Inside the domestic part of the economy business investment spending fell, government spending was soft, but private household consumption rose and spending on residential property was up strongly. Within the domestic economy, New South Wales was very strong with spending up by 2.4% in the quarter, Victoria registered 0.7% spending growth but three heavily resource influenced states went backwards with spending in South Australia, Queensland and Western Australia down respectively by 0.1%, 0.8% and 1.5%.

April and May economic readings were mostly disappointing. April retail trade rose, but only by 0.2% in the month, home building approvals fell by 5.6% and housing finance commitments were flat. In May employment broke the recent run of improving numbers and fell by 4,800, although the unemployment rate remained stable at 5.8%. Business and consumer sentiment indicators showed no real recovery from the damage in the immediate wake of the Federal Budget. The RBA, according to the minutes of its June policy meeting, is not unduly concerned by the softer turn in the economy and even expected as much. Nevertheless the confirmation of softer turn in the economy means that the RBA will be even more steadfast sustaining very accommodative monetary policy for longer. We now see the cash rate staying on hold at 2.50% until at least March next year.