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July economic roundup
Our monthly roundup of global and local economic data and events shows a distinct strengthening in the world’s two biggest economies, the United States and China, but still very fragile growth in continental Europe and mixed-strength economic readings in Australia. Geopolitical concerns remained prominent, notably in the Ukraine and the Middle East. The world’s major central banks, including the RBA, are mostly trying to support economic recovery, leaving official interest rates low as long as possible.
In the US, business surveys released in July were particularly strong pointing to improving business spending through the second half of 2014. Among the regional surveys, standouts were the July Empire (New York) State rising to 25.6 from an already very strong reading of 19.28 in June and the July Philadelphia Fed index lifting to 23.9, the highest reading since March 2011, and up from 17.8 in June. Beyond the run of manufacturing business surveys, the National Association of Homebuilders’ index also lifted to its best reading since January at 53, up from 49 in June, although other indications of housing activity were mixed.
Among the official data points for the US economy, employment has improved sharply in 2014 so far and the June report of non-farm payrolls continued the better run showing a bigger-than-expected lift of 288,000, the fifth consecutive monthly 200,000+ reading. The US unemployment rate fell to 6.1% in June and is now below where it stood at the onset of the global financial crisis in 2008. Notwithstanding the considerable improvement in US employment, Federal Reserve Chairman, Janet Yellen, is adamant that much more improvement needs to occur to reduce the “scourge” in her words of unemployment. In detailed semi-annual testimony to US lawmakers, Chairman Yellen also made it plain that besides wanting an even stronger employment market she also holds some concerns that housing activity may be starting to fade. The clear message is that the Fed sees no urgent reason to start lifting interest rates and even when it does rate moves are likely to be gradual and reversible if the economy does not perform along the lines forecast by the Fed.
In China, the economic numbers took a mostly better turn. June readings showed exports up 7.2% y-o-y; industrial production up 9.2% y-o-y; retail sales up 12.4% y-o-y; and urban fixed asset investment spending up 17.3% y-o-y. Q2 GDP confirmed the improved with GDP lifting 2.0% q-o-q, or 7.5% y-o-y, up from 1.5% q-o-q, or 7.4% y-o-y in Q1. Another way of looking at the GDP numbers is that growth effectively rose from an annualized 6.0% in Q1 to 8.0% in Q2. Importantly, the strength in Q2 looks set to continue in Q3 and Q4. The flash reading of the July HSBC/ Market manufacturing purchasing managers’ index (PMI) lifted to a surprisingly strong 18-month high of 52.0, up from 50.8. Selective policy easing ranging from easing restrictions on second home purchases to lower reserve ratio requirements for some regional banks also point to firming growth in the second half of 2014.
In contrast to the improving growth signs in the US and China, growth in the European common currency area appears to be struggling. Industrial production has weakened in May and retail sales are soft. European inflation remains very weak at 0.5% y-o-y and given high levels of excess capacity in Europe, deflation still remains a potential risk. Most likely, the European Central Bank will respond to the signs of economic weakness and will ease monetary conditions further over coming months. Interestingly, outside the common currency, the strong recovery in the British economy continued in Q2. British GDP rose by 0.8%, 3.1% y-o-y after increasing by 0.8%, 3.0% y-o-y in Q1. Despite the improvement in the British economy, the Bank of England still maintains very easy monetary conditions, but will probably be among the first of the major central banks to start lifting interest rates, most likely early in 2015.
In Australia, low interest rates continued to foster very strong housing activity. May home building approvals jumped up by 9.9% in the month helping to confirm that much stronger home building activity will feature throughout 2014. Otherwise, household spending growth is proving patchy. After the strong burst of retail spending late in 2013 and early in 2014, sales have turned weaker over recent months down by 0.5% in June after a 0.1% fall in May. In contrast, new car sales have been stronger, rising each month through Q2 after falling in Q1.
The value of exports has taken a marked turn for the worse in Q2 as well, in part a function of much softer prices for coal and iron ore. Strong Australian Q1 GDP growth was mostly down to a big growth contribution from net exports, but the contribution to growth in Q2 will be negligible, possibly even negative. The undulating fortunes of key parts of the economy –retail sales and exports – is occurring while the fall in mining investment spending still looms large. The RBA expects that the Australian economy, even though it grew briefly at above long-term trend pace in Q1, will settle below trend growth again through the second half of 2014.
The RBA’s forecast of several quarters to come of sub trend GDP growth with the corollary of still relatively subdued employment growth, weak wages growth and a sticky unemployment rate around the 6.0% June reading means that it is not unduly concerned by inflation tracking near the top of its 2-3% target band in Q2. The recently released Q2 CPI showed an increase of 0.5% q-o-q, 3.0% y-o-y and the underlying inflation readings monitored closely by the RBA, the trimmed mean (+0.8% q-o-q, +2.9% y-o-y) and the weighted median (+0.6% q-o-q, +2.7% y-o-y), were also close to the top of target band. However, as long as inflation is failing to feed through to higher wages growth (annual wages growth at 2.6% y-o-y in both Q4 2013 and Q1 2014 was at a two decade lowpoint), the RBA’s view is likely to remain that inflation will fade over coming quarters and without any need for anti-inflationary policy action on their part.
The RBA again left the cash rate unchanged at 2.50% at its early July policy meeting and again in the accompanying statement, the minutes of the policy meeting and in recent speeches by RBA Governor, Glenn Stevens, made it plain that a period of stability in interest rates remains what the economy needs. We do not expect the “interest rate stability” guidance to change during the remainder of 2014. We do see a mild interest rate hiking cycle commencing in 2015 and tentatively pencil in March as the likely start date for hikes. Our conviction around this forecast is not strong and any signs of untoward softening in economic activity over coming months would delay considerably the start of monetary policy tightening.