The global and Australian economies appear stuck in a groove of slow economic growth, low inflation and very low interest rates. There appears to be little capable of lifting the world on to a stronger growth trajectory, but saying that does not mean that the world is destined to slide in to recession. Instead what we are seeing currently in terms of growth and inflation looks set to persist, possibly for years to come.
Latest economic readings from the US hint at stronger consumer spending, a 1.3% lift in April retail sales and still up 0.8% after excluding automobile sales. Yet just as the US consumer is showing signs of life, previously strong employment growth is showing signs of fading. Non-farm payrolls showed one of their softer monthly gains in April, up 160,000 after a long run of 200,000+ monthly gains. More worryingly, one leading indicator of US employment growth, the weekly initial jobless claims series, has taken a weaker turn over the past couple of weeks with claims lifting 20,000 for the most recent reporting week after rising 17,000 the week before taking the total to the highest level in three months.
This pattern of one part of the US economy showing strength as another fades has been evident over the entire recovery period from the 2008 global financial crisis. The US economy has been and still is growing, but slowly relative to previous economic recovery phases. The pace of growth remains slow. US GDP grew at only 0.5% annualised pace in Q1 2016 from a not much better 1.4% clip in Q4 2015. Signs of stronger household spending imply thatQ2 GDP growth may improve to above 2.0%, but that would still leave annual GDP growth averaging not much better than 1% since mid-2015.
Europe’s annual GDP growth rate is also struggling to do much better than 1.5% y-o-y notwithstanding support from very accommodating monetary policy. Some of Europe’s member economies are growing relatively well, but some are still struggling such as Greece or barely growing in the case of France and Italy. Europe is again skirting deflation – headline inflation rate -0.2% y-o-y in April- which also implies a long struggle ahead to promote economic growth close to potential above 2%.
China’s annual growth rate has slowed to 6.7% y-o-y in Q1 2016 and briefly there was a hint of better growth ahead in Better March economic readings relating to exports, industrial production, consumer spending and urban fixed investment spending. The glimmer of hope for better growth ahead contained in the March readings has taken a dent with April readings all showing quite significant softening. There are also indications in the financial press in China almost certainly fully-endorsed by the Government that in the interest of sustaining longer term economic reform the authorities may not pursue expansionary economic policies in response to potentially softer GDP growth.
In short, if China’s GDP growth rate lifts towards 7% – as many analysts thought likely as little as a week or so ago – it now looks as if the move will be very brief and ahead of China’s GDP growth ebbing blow 6.5% y-o-y later this year or in 2017.
As far as Australia is concerned, annual GDP growth is running in a 2-3% groove, a touch weak by historical comparison, but good by the current standards of other advanced economies. Household spending growth is fading – real retail sales were up by only 0.5% in Q1 2016. Spending on housing is still growing, but not as fast as it was through almost all of 2015. The latest interest rate cut from the RBA and probably more interest rate cuts later this year should help to arrest slowing household spending for a period. But if this occurs it will be in the face of potent factors encouraging greater caution on the part of households. In the near-term the Federal election presents different tax outcomes relating to housing and superannuation. Many households are very reasonably likely to adopt a “wait and see” approach with their spending plans.
A long grinding negative influence on household spending growth is the continuing slow growth in wages. The Q1 wage price index is due this week and the consensus forecast is a result identical to Q4 2015, wages up 0.5% q-o-q and by 2.2% y-o-y. The annual change would equal the record low for the survey set the previous quarter. More importantly there is no sign of any acceleration in wages growth over coming quarters. The risk is on the side of even lower outcomes as businesses continue to look for ways to trim costs.
Whether it is the US, Europe, China or Australia it is very hard to see factors that might cause growth to accelerate other than briefly. In contrast it is much easier to see the forces keeping inflation very low. What we have experienced over the last year or two is showing every sign of continuing for the next year or two. Interest rates are likely to continue moving lower periodically in this persistent low-growth, low-inflation environment.