There is good economic news running towards Christmas this year, although it may seem that the opposite is the case given the weak performance of most share and credit markets so far in December. The world’s two biggest economies, the US and China seem to have both taken a stronger turn in Q4 and despite falling energy and mineral export prices the Australian economy is looking pretty robust too running in to the end of the year.
Since the beginning of December, US data has shown a stronger-than-expected lift in employment in both October and November – non-farm payrolls lifted over the two months combined by 509,000 – and a promising lift in November core retail sales (excluding automobile sales) by 0.4% in the month. October factory orders also lifted by 1.5% in the month. The US economy seems to be growing at close to 3% annualized pace in Q4.
If the US Fed does what it seems to have been implying it will do this week and lifts the Fed funds rate by 25bps at its policy meeting it is simply a sign that the US economy is growing demonstrably well enough to need less accommodating monetary policy. The Fed is in the process of moving slowly from very accommodating policy to eventually a policy setting that is more neutral.
Financial markets should be able to take the Fed’s policy move without too much adverse reaction – arguably the adverse reaction is all happening in advance of the move. Yet the approaching Fed rate hike is still exciting comment about negative consequences including potential to generate a disorderly lift in longer-term US interest rates; potential to drive up the US dollar hurting US exporters and multi-national businesses; and a stronger US dollar making more difficult the debt servicing issues in many emerging economies. While these negative consequences could occur, the probability of them occurring diminishes considerably if US economic growth stays robust as it is showing strong signs of doing.
In China too, the economic news seems to have taken a turn for the better. Almost all of China’s November economic data released over the past week has mostly been better than expected, including readings relating to areas of activity where China is rebalancing away from. Industrial production lifted by 6.2% y-o-y in November against 5.6% expected and 5.6% in October. Urban fixed asset investment spending grew at the same pace in November as in October, 10.2% y-o-y and against expectation of a small decline to 10.1%. In one part of the economy that China’s authorities see as a preferred driver of growth, retail sales, the acceleration evident over recent months continued to 11.2% y-o-y (market expectation 11.1%), up from 11.0% in October.
China is still battling against producer price deflation and weak exports, but in aggregate GDP growth appears to be lifting a little to 7.0% y-o-y, perhaps a little higher in Q4, from 6.9% in Q3. When the Q4 GDP data is released in mid-January it should help to alleviate some of the more negative commentary that China is still at risk of a hard economic landing.
In Australia, the non-mining parts of the economy seem to be gathering momentum. Business sentiment in general is quite firm according to the latest November NAB monthly survey with forward-looking business confidence lifting to +5 from +3 in October and business conditions reading steady at an elevated +10 in November. Retail trade lifted by 0.5% in October, a better gain than expected, and after rising by 0.4% in September and promising a reasonably strong contribution from household consumption to GDP in Q4.
The biggest upside surprise for the Australian economy has been the strength of employment, up 71,400 (the market expected -10,000) in November after lifting by 56,100 in October. Employment rose by 3.0% y-o-y in November and even though wages growth is very modest, up 2.3% y-o-y in Q3, the combined impact of strong employment growth and modest wages growth is helping to generate an increasing lift in household disposable income important in helping to sustain reasonable growth in retail trade and also helping to ensure that the topping out in housing activity will be followed by a modest, not a precipitous fall built in to the forecasts of many overseas hedge funds looking at Australia’s prospects.
Of course there are still negative factors that will have an influence on Australia’s economic outlook. The mining investment downturn still has some way to run. The Federal Government faces a deteriorating budget position as this week’s Mid-Year Economic and Fiscal Outlook will illustrate. But on balance, Australia’s economy is performing better than widely expected in the face of these problems. One consequence is that RBA is likely to hold the cash rate unchanged at 2.00% for the next few months. Another consequence is that Australian risk assets do not seem to have factored in the improvement in the Australian economy. In our view, that leaves risk assets already looking oversold more at risk of a turn for the better than a turn for the worse.