For a more comprehensive roundup of the week, listen to Stephen’s full report here.
Global economic readings were again mixed strength through March with signs of moderating economic growth in the US and China, but with improving readings mostly in Europe. In Australia, annual GDP growth moderated further in Q4 2014 and the monthly readings for January and February, notwithstanding considerable strength in housing indicators, imply further moderation in growth in Q1 2015. The major central banks retain very growth-accommodating monetary policy positions, including the US Federal Reserve where Chair Janet Yellen made it plain that while the Fed would start lifting the funds rate, it would not happen until later in the year and would be a cautious affair beyond that point. While the RBA did not follow up its February cash rate cut at its March policy meeting, it made it clear that more cash rate cuts were likely.
US economic readings published in March presented a true mixed bag. The final revision of Q4 2014 GDP showed growth languishing at 2.2% annualized pace, down from 5.0% in Q3. In contrast, the US labour market remained very strong. February non-farm payrolls were much stronger than expected by the market, up by 295,000 and the unemployment rate fell to an 8-year low of 5.5% from 5.7% in January. Despite strong employment growth, retail sales continued to languish, down by 0.6% in February after falling 0.8% in January. Durable goods orders – a marker of business investment spending – were also weak. Excluding the lumpy orders for transport equipment such as aircraft, durable goods orders fell by 0.4% in February after falling 0.7% in January.
US housing activity was very mixed in February. Sales were stronger with existing home sales up by 1.2 and new home sales up a hefty 7.8%, off an upwardly revised January reading. However, February housing starts slumped, falling by 17.0% and the March National Association of Homebuilders’ index was weaker than expected, slipping to 53 from 55 in February.
The Fed, faced with the differing forces influencing the US economic outlook, downgraded its US growth and inflation forecasts at its March meeting, while improving slightly its employment outlook. The forecasts by the various regional Fed governors and presidents of where they saw the funds rate at the end of 2015, were also lowered to an average 0.625% from 1.125% previously. Fed Chair Janet Yellen said at the press conference after the meeting, that although the Fed was dropping the word “patient” indicating when it would raise rates, that did not mean it was becoming “impatient” to raise rates. The rate guidance was refined further in a speech at a San Francisco Fed conference indicating that no rate increase was likely until later in the year and that the process of normalizing US interest rates would not follow a predictable path, but would be more cautious than usual and very sensitive to how the US economy performed.
In China, data releases and survey readings were mostly weaker than expected and consistent with annual economic growth decelerating below 7.0% y-o-y early in 2015. The Chinese Government announced its economic plans for 2015 incorporating a lower GDP growth target of 7.0% for 2015 with continuing moves to make growth cleaner in every sense of the word. All of the combined January/February economic readings were weaker than expected with retail sales slowing to 10.7% y-o-y from 11.9% in December; urban fixed asset investment spending down to 15.0% y-o-y from 15.7% in December; and industrial production down to 6.8% y-o-y – the slowest reading since 2008 – from 7.9%. Weaker industrial production growth in China, together with the slowing in investment spending growth, continue to exert downward pressure on industrial commodity prices, notably coal and iron ore prices.
In contrast to the US and China, European economic readings were mostly firmer than expected through March and coincided with the European Central Bank starting to purchase sovereign bonds as part of the QE program announced back at its February policy meeting. Retails sales in Europe have improved particularly well and the latest reading for January showed a 1.1% increase, well above market expectations, and after a solid 0.4% gain in December. The labour market in Europe is also improving and in January, the unemployment rate fell to 11.2% from a downwardly revised 11.3% in December. Germany leads in terms of falling unemployment and the rate is down to 4.7%, from 4.8% in December.
Europe still faces problems, deflation is entrenched in several countries, and Greece’s sovereign debt problem is only being contained by temporary extensions by creditors, the most recent of which has almost run out. Nevertheless, Europe is starting to grow and with lengthy support from the ECB (the current monthly QE purchases will run until at least September 2016), it looks much less likely to falter than it did through 2014.
In Australia, annual economic growth slipped to 2.5% y-o-y in Q4 2014 from 2.7% in Q3. The two main factors weakening growth are weakening business investment spending, notably weaker mining investment, and very weak growth in national income (growth in real net national disposable income was only 0.5% y-o-y in Q4) driven primarily by falling export prices, but also by soft wages growth too. Housing activity is booming. Spending on housing lifted in real terms in Q4 2014 by 5.3% q-o-q, 16.5% y-o-y. Household consumption spending is also increasing, up in real terms in Q4 by 0.9% q-o-q, 2.8% y-o-y, but is still far from strong enough. Elsewhere, export volumes are rising and contributing to growth, but government spending growth is comparatively soft. All told, the economy is growing well below long-term trend and the tendency is for the unemployment rate to rise. The unemployment rate edged down to 6.3% in February, from 6.4% in January, but it is expected to drift higher over coming months.
The RBA responded to the comparatively soft economic outlook and evidence of very low inflation in Q4 2014 by cutting the cash rate by 25bps to 2.25% at its February policy meeting. In March, the RBA decided to hold the cash rate at 2.25% rather than cutting again. The reasoning it gave in the minutes of the March meeting for not cutting rates again was a desire to monitor the impact of the February rate cut and see if the RBA’s latest and quite dour economic growth forecasts are on track. The RBA provides its next revised growth and inflation forecasts early in May in its quarterly Monetary Policy Statement. It is hard to see it making any material changes to its forecasts implying a need for lower interest rates. We now see the RBA cutting the cash rate by another 25bps to 2.00% at its early May policy meeting and a further 25bps cash rate cut to 1.75% in early August.