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Our monthly roundup of global and local economic data and events indicates some stabilisation in global growth, notwithstanding slowing growth in China, but also a noticeable lift in Australian economic activity finally extending to the labour market. Central bank policy intentions appear to be starting to diverge. The US Federal Reserve (Fed) announced its third consecutive $US10 billion reduction in its asset purchase programme (quantitative easing) in March. The Fed also appears increasingly confident that US economic expansion will continue to the point where Chairman Janet Yellen provided forward guidance on policy indicating that QE would continue to be wound down at each policy (FOMC) meeting and that if all went in line with Fed forecasts the Fed funds rate, currently at zero might start to rise about 6 months after the end of QE and could be up to 1.0% by the end of 2015.
Most economic data released in the US through March seems to indicate the beginnings of a rebound from the impact of unusually severe winter weather. February readings of retail sales, up 0.3% in the month, and industrial production, up 0.6% were both promising and more forward looking indicators, such as February durable goods orders, up 2.2%, and March consumer confidence, unexpectedly lifting to the highest reading of the recovery so far at 82.3, also point to growth gathering momentum. Housing indicators are still a little soft, but should lift with the warmer weather. Importantly, US non-farm payrolls lifted quite sharply in February, by 175,000 after an upwardly revised 129,000 increase in January.
European economic indicators released in March remained consistent with slow economic recovery although inflation remained low prompting the European Central Bank to comment that it would remain vigilant monitoring any risk of deflation. Unlike the US Fed, the ECB maintains a bias towards easing monetary policy further. In China, a run of weaker than expected February economic readings and relatively tame inflation has also prompted market speculation that the Peoples’ Bank of China may be in a position to ease policy soon, possibly reducing the banks’ reserve ratio requirement. China’s senior politicians have indicated in March both a commitment to extensive economic reforms that may come at the cost of softer economic growth near-term, but also a reluctance to allow growth to fade too much and proposals for several new rail projects as part of longer term urbanization plans indicate that official commitment remains very strong to achieve 7.5% GDP growth in 2014.
In Australia, economic readings released in March indicate that policy efforts to lift household spending to offset declining mining investment are working. Early in March the Q4 2013 GDP release showed stronger than expected 0.8% growth in the quarter with strong contributions to growth from household consumption expenditure and exports. Beyond Q4, various January economic readings were almost uniformly strong. January home building approvals were particularly robust, up by 6.8% in the month and up 34.6% compared with January 2013. The latest lift in home building approvals comes after a run of consistently high monthly readings since mid-2013 and all but guarantees very robust home building activity (including strongly rising employment in the sector) through 2014.
Other notable March releases included a big lift in January retail sales, up by 1.2%, and a very sharp improvement in Australia’s international trade balance in January to a surplus of $A1.4 billion from $A0.6 billion in December 2013. Much of the improvement in the trade balance came from a 3.7% lift in exports in the month.
The most surprising economic release in March was the February labour force report showing a much bigger than expected gain in employment, up 47,300 (including an 80,500 lift in full-time employment) and coming after January employment was revised to a gain of 18,000 from an initial print of a loss of 3,700 jobs. The sudden turn for the better in employment may be in part a statistical quirk, but some of it is probably real given the way that a wide range of indicators of economic activity have been improving.
Certainly, the Reserve Bank (RBA) appears to be becoming less cautious in its economic outlook. Also, the RBA is starting to warn that sharply rising house prices are unsustainable and can potentially present problems in terms of financial stability. The RBA indicated that is closely monitoring both the lending standards of financial institutions relating to housing and the borrowing behavior of the household sector. None of these recent comments imply that the RBA is unduly concerned just yet, or is about to start lifting the cash rate, but the comments do imply that the next move in interest rates when it comes will be a hike.
Looking ahead, we expect Australian economic indicators to be mostly consistent with accelerating economic growth. We see annual economic growth running above long run average (around 3.1%) in the second half of 2014. Also we see the unemployment rate, currently at 6.0%, starting to edge lower in Q2 2014. Inflation looks set to continue surprising on the upside of most forecasts driven by housing pricing pressures and comparatively big price and tax increases emanating from the public sector grappling with budget cut backs. As far as the interest outlook is concerned, we see the Q1 CPI release in late April and the Q2 CPI release in late July as the two key data points that are likely to set the RBA on the road of lifting interest rates, probably starting in August.