Very mixed-strength signals are showing relating to both the world’s major economies as well as Australia. It is very hard to tell whether economic growth is sliding or improving either internationally or here in Australia. As a result, the strong rally in risk assets that occurred last week may be hard pressed to push much further. The mixed-strength economic outlook would imply to us continuing volatility in financial markets rather than consistent rallies or selling.
Among the biggest economies, the US showed signs over the past week of soft Q1 economic growth but also evidence of continuing strength in its labour market. Pointing to soft Q1 economic growth, March retail sales were disappointingly weak, down by 0.3% m-o-m, after being flat in February and pointing to Q1 real household consumption growing at not much better than 1.0% annualised pace, well down on the 2.4% clip reported in Q4 2015 and the main reason why GDP managed to grow at 1.4% annualised pace. The softer contribution to US GDP growth from household consumption points to Q1 GDP (due Thursday 28th April) growing no better than 0.5% annualised.
March industrial production, down by a greater-than-expected 0.6% m-o-m after falling by 0.6% in February is also pointing to a soft Q1 GDP report. Yet amid concern that US economic growth is really starting to struggle, there are some inconsistent signs. The US employment market still seems to be improving quite strongly. The latest weekly initial jobless claims showed a surprising reduction to 253,000 the lowest reading in 43 years and implying that nonfarm payrolls continue to grow by more than 200,000 a month.
Also the weakness in US manufacturing may be starting to turn. Regional manufacturing surveys have taken a noticeably stronger turn in March and again in April. The April Empire State, or New York State, manufacturing survey jumped strongly to a reading of +9.56 (zero is the expansion/contraction line for this survey) from +0.62 in March. Back in February and January this same survey was showing deeply contractionary readings of respectively -16.64 and -19.37.
US economic growth has been weakening, but not in all regards and it could be on the brink of taking a stronger turn. The outlook for the world’s biggest economy, the US, is confused at best. The same is true of the world’s second biggest economy, China.
China’s GDP growth rate has been slowing and did again in Q1 2016 to 6.7% y-o-y from 6.8% in Q4. China’s government says that the economy can grow at a 6.5% to 7.0% pace over the next 5 years and that growth will reflect a more sustainable balance of spending – less frenetic growth in capital investment spending and exports but stronger consumer spending growth. Also China’s output will be less focused on industrial production, but more focused on services. All well and good in principle, but international financial markets have been agnostic about the ability of China to institute the economic reforms and policies that will foster enough rebalancing in its growth drivers and prevent an over-investment boom turning to lengthy bust resulting in China losing growth impetus entirely, much as occurred in Japan in the decades after its great asset boom peaked back in 1990.
The March economic readings from China provide a hint that China’s GDP growth rate may stabilize in Q2 and that there has been some traction from policy easing moves by the Peoples’ Bank of China over the past year and more recently budgetary moves by the Government too. Annual growth in exports jumped in March to 11.5% y-o-y; industrial production rose 6.8% y-o-y; retail sales 10.5% y-o-y; and urban fixed asset investment spending by 10.7% y-o-y. All accelerated from January/ February and all were stronger than analysts’ consensus forecasts. For the time being China is showing signs of better growth, but the issue of whether growth can be maintained is still in some doubt. If the window of better growth is not used to a commitment to substantial economic reforms, the sustainability of China’s economic growth rate will almost inevitably become a concern again at some point.
In Australia too, mixed-strength economic readings and survey results abound. Housing activity is now only strong in pockets of the major cities. There are also much weaker pockets developing, especially in new home unit development and to the point where the RBA is watching whether property developers are starting to become a rising source of non-performing loans for banks according to the latest Financial Stability Review released last week.
The latest business and consumer sentiment surveys are pointing in opposite directions. The March NAB business survey was strong with business confidence lifting to +6 from +3 in February and business conditions to +12 from +8 in February. In stark contrast, the April Westpac consumer sentiment survey showed a fall in the index of 4.0% m-o-m, after falling 2.2% in March. The Westpac consumer sentiment survey is consistent with recent relatively soft monthly retail sales readings and seems to point to further weakness ahead.
The latest labour force report for March was also released last week and was relatively strong breaking a run of three soft monthly reports before, albeit those reports coming after two particularly strong reports back in October and November last year. In March, employment rose by 26,100 after falling on revision by 700 in February and also falling by 8,000 in January. The employment news was good for March, but poor for the three months ending March where employment rose by 17,400 compared with much bigger gains for the three months ending December 2015 and three months ending September of respectively 122,000 and 58,800.
Another positive surprise in the March labour force data was the unemployment rate edging down to 5.7% from 5.8% in February. The unemployment rate has come down from 6.0% in January and although the reduction looks impressive it has come not from strong employment growth but rather a decline in the labour force participation rate from 65.1% in January to 64.9% in March. In other words the labour market is not as strong as the falling unemployment rate implies and employment growth needs to stay at least as strong as it was in March if the unemployment rate is to stay down.
All told, Australia’s economic outlook is as messy and confused as the global economic outlook. The risk is that financial markets will again start to reflect this unconvincing economic outlook with renewed bouts of volatility.