Global economic readings in May continued to indicate growth struggling to gain momentum. In the US, the advance reading of Q1 GDP showed growth had moderated almost to a standstill at 0.2% annualised pace from 2.2% in Q4 2014. Moreover the Q1 GDP reading was expected to be revised lower on later revisions and April and May economic readings point to only a moderate rebound in Q2. In China growth seems likely to slow below the 7.0% y-o-y pace reported in Q1 on the basis of a weak run of April economic readings. In contrast to the slower growth pace in the US and China, European growth improved slightly to 1.0% y-o-y in Q1 from 0.9% y-o-y in Q4 2014. Australia’s Q1 GDP report is not due until early June, but even though some monthly economic readings improved early in 2015 it seems likely that annual GDP growth will slow to 2.0% y-o-y, or less, from 2.5% in Q4. Central banks remain committed to maintaining accommodating policy conditions, although the US Fed is still indicating that it will probably lift its funds rate from near-zero later in the year. The RBA maintains a policy easing bias, but contingent upon the relative strength of the local data.

US economic readings published in May were still mixed-strength. Non-farm payrolls rebounded in April, up 223,000 after an even softer than first published result in March after revision of +85,000. The unemployment rate fell to a new recovery low mark of 5.4% in April from 5.5% in March. Despite the strong labour market report, however, wages growth was tame with hourly earnings up only 0.1% in the month. Indicators of US housing activity in April ranged from very strong for housing starts, +20.2% m-o-m, to weak for existing home sales -3.3%. April retail sales, unchanged in the month, and industrial production, -0.3%, were both disappointingly soft. Previously very strong consumer sentiment took an unexpectedly sharp tumble in May falling to 88.6 from 95.9 in April.


All told, it seems that the rebound from the clear weak patch in US economic growth in Q1 is not likely to be particularly strong and much less pronounced than the rebound that occurred in Q2 2014 after a weak first quarter. Also, the US inflation picture is becoming muddier. Import prices and producer prices unexpectedly fell in April, but the CPI after taking out food and energy prices rose by a greater-than-expected 0.3% m-o-m. The Fed is watching the data to judge when the economy is robust enough with sufficient sign of inflation increasing to 2.0% y-o-y to be able to cope with a first interest rate hike. Fed Chair, Janet Yellen, reaffirmed that the Fed is on course to start lifting rates later in 2015, but the growth data still needs to be consistently stronger.


In China, the monthly economic readings continued to run more softly than expected, In April exports and imports fell respectively by 6.4% y-o-y and by 16.2% y-o-y. The run of indicators of domestic spending and activity in China were also soft with April industrial production improving less than expected, by 5.9% y-o-y from a seven-year low of 5.6%; April retail sales slowing to 10.0% y-o-y from 10.2% in March; and urban fixed asset investment spending slowing to 12.0% y-o-y from 13.5% in March. The economic readings are consistent with slower economic growth than China’s Government is planning and the Peoples’ Bank of China followed up its 100 basis point cut in banks’ reserve ratio requirement in April with 25bps rate cuts to its deposit and one-year lending rates in May. The Government has also announced changes making it much easier for local government authorities to borrow for infrastructure projects. The policy easing moves have been substantial and more moves are likely if growth continues to show signs of languishing below 7.0% y-o-y.


In Europe, Q1 GDP rose by 0.4% q-o-q and by 1.0% y-o-y, up from 0.3% q-o-q, 0.9% y-o-y in Q4 2014. The performance was mixed among the big four economies in the euro-region with Germany recording 0.3% q-o-q GDP growth, about half the pace expected, whereas France, +0.6% q-o-q; Italy, +0.3% q-o-q; and especially Spain, +0.9% q-o-q all performed better than expected. More recent monthly economic readings point to patchy progress in Q2. Imminent interest payments on Greek debts owed to the ECB and the IMF are also unlikely to be paid without further debt concessions from creditors who remain adamant on the budget changes Greece must make to obtain further concessions. The refusal of Greece to agree to terms remains a potentially disruptive influence on the mildly improving European economic outlook. The European Central Bank continues to work towards supporting European growth reaffirming at its latest meeting its commitment to continue QE at the pace of 60 billion euro of purchases a month to late 2016.


In Australia, housing activity remains mostly strong and was assisted further by the RBA’s decision to cut the cash rate 25bps to 2.00% at its May policy meeting. Shortly after in its quarterly Monetary Policy Statement the RBA reduced its growth and inflation forecasts for 2015 and 2016 a signal that it retains a bias to cut interest rates further and correcting an inaccurate market interpretation of the initial statement accompanying the rate cut that the RBA had called an end to rate cuts. In the minutes of the May meeting and in later comments by senior RBA officials it became plain that the RBA is watching how well household consumption and business investment spending lift to offset the negative influences on growth to determine whether the economy needs more rate cuts. The RBA also recognises there is a fine balancing act with housing so strong in parts where the household sector could become too highly leveraged.


In terms of the regular data reports, March housing finance and home building approvals were both very strong up respectively by 3.5% m-o-m and 2.8%. Retail sales rose by 0.3% decelerating from a 0.7% lift in February and over Q1, real retail sales lifted by 0.7% q-o-q, down from 1.2% q-o-q in Q4 2014. April employment pulled back by 2,900, but after a 48,200 gain in March and the unemployment rate edged up to 6.2% from 6.1% in March. International trade data showed mostly widening trade deficits through Q1 and are consistent with net exports detracting about 0.3 percentage points from Q1 GDP growth.


The Government’s May budget was a less contractionary affair than the 2014 Budget and contained significant near term boosts for small businesses to encourage them to spend more. While the Budget seems to have been well received it is unlikely to make a material difference to the RBA’s economic forecasts. We view the months in which the RBA reviews its economic forecasts as the most likely for policy change. The next quarterly review is in August and will come after what it is likely to be a soft Q1 GDP report in early June and a low inflation report for Q2 at the end of July. We still see the RBA cutting the cash rate at least one more time with the next 25bps cut to 1.75% most likely occurring at the early August policy meeting.