For a more comprehensive round up of the week, listen to Stephen’s full report here.
Fear of fading global economic growth dominated through much of November even though the world’s biggest economy, the United States, continued to show signs of stronger economic expansion. In contrast, the signals from the world’s second biggest economy, China, were mostly softer than expected taking a toll on important commodity prices for Australia such as iron ore. Late in the month the Peoples’ Bank of China cut official interest rates – the one-year deposit rate and one-year lending – by respectively 25 basis points (bps) and 40 bps to 2.75% and 5.60%. The rate cuts were unexpected and the first in two years showing that China’s growth prospects had softened more than the authorities would like. European economic readings remained soft although Q3 economic growth was a touch stronger than expected at 0.2% q-o-q. Australia continued to show signs of sub trend growth with softness persisting in the labour market. Housing activity, notably investor housing activity remained buoyant, but the patchiness of economic growth generally combined with little inflation allowed the RBA to reaffirm that the cash rate’s already lengthy stay at 2.50% could extend for many more months.
In the US household spending showed signs of lifting a notch or two in November. Retail sales rose by 0.3% in October and sentiment indicators are very promising for November with both consumer sentiment and consumer confidence at their highest levels since before the global financial crisis. Existing home sales were firmer than expected too in October, up by 1.5% after lifting 2.6% in September. Falling gasoline prices in the US are boosting household spending power in the US, but the long run of strong growth in monthly non-farm payrolls, up another 214,000 in October, and the tumbling unemployment rate, down to 5.8% the lowest rate since mid-2007 provide the key impetus for greater optimism in the household sector.
Leading indicators of US business activity were strong too in October providing reason to expect that strong US GDP growth in both Q2 (4.6% annualised growth) and Q3 (3.5%) will persist in Q4. The US Federal Reserve removed the last $US15 billion of its quantitative easing program at its late October policy meeting although continued to indicate that it would still be some time before it starts to lift its funds rate currently set near zero.
In China, the regular monthly economic readings were mostly softer than expected in October with the one exception of exports, up 11.6% y-o-y. In contrast, industrial production growth moderated to 7.7% y-o-y from 8.0% in September, retail sales edged down to 11.5% from 11.6% and urban fixed asset investment fell to 15.9% from 16.1%. Inflation remained soft too, stable at 1.6% y-o-y in October and well below the PBOC’s target of 3.5%. Soft purchasing manager readings added to the perception that economic growth could slide below 7%, too low from the perspective of the authorities keen to ensure reasonable employment prospects in China’s cities.
In Europe, Q3 GDP came in a touch higher than expected at 0.2% y-o-y with three of the big four European economies showing positive growth – Germany +0.1% q-o-q, France +0.3%, and Spain +0.5%. Industrial production rebounded by 0.6% in October after falling 1.4% in September, although leading indicators of manufacturing activity for the euro-area weakened. European inflation remained weak at 0.4% y-o-y in October and the unemployment rate was steady at 11.5%. There remained a sense of fragility about European growth seeming to require more expansionary policy action. ECB President Draghi continued to talk of the possibility of further easing in European monetary conditions, while plans for a European infrastructure fund became a little more tangible.
In Australia, economic readings were mixed-strength through November. September retail sales were surprisingly strong up by 1.2% contributing to firm Q3 real retail sales, up 1.0% q-o-q. September home building approvals, in contrast were surprisingly weak, down by 11.0% in the month and there was also a more pronounced deterioration than expected in Australia’s international trading position in September driven in part by weaker commodity prices with the deficit widening to $A2.3 billion from $A1.0 billion in August. The Australian statistician’s revamped labour force data incorporating new seasonal adjustment factors showed employment up a comparatively strong 24,100, but the unemployment rate was unchanged at 6.2%. Q3 wages data remained soft at +0.6% q-o-q, 2.6% y-o-y.
Forward looking indicators were mixed. Westpac consumer sentiment for November lifted by 1.9%, but still has not recovered the losses suffered in the wake of the May Budget. The October NAB business survey, however, showed a big lift in business conditions to +13 from +1, the biggest monthly improvement in the entire sixteen year history of the survey. The forward looking business confidence part of the survey was not strong showing a small dip to +4 from +5.
Sifting through the conflicting signals about the economy, the RBA in its quarterly monetary policy statement released early in November, reaffirmed that it expects sub trend economic growth to persist to late 2015 with inflation contained inside 2-3% target band throughout 2015 and 2016. The RBA is a little concerned about the proliferation of interest only loans in the investment housing market, but hints that if policy action is needed that may come through light application of macro-prudential control, not through interest rates.
Looking ahead, concerns about decelerating global economic growth seem likely to fade over coming months. US economic growth is gathering pace. In China, the authorities are showing signs of wanting to arrest the decline in economic growth. In Europe too, there are signs that more expansionary policy settings are not too far away. Australian economic conditions should continue to improve erratically. The sharpest part of the slide in commodity prices may be over. The housing boom is also showing signs of fading which should allow the RBA to maintain low interest rates for longer.