The global economic expansion appeared to continue at a moderate pace through September with the balance of US economic readings quite strong, a firmer tone in China’s August economic data, but a slightly softer tone to European economic data. Australia’s economic readings remained mixed strength, although headline annual GDP growth in Q2 lifted to a four-year high of 3.3% y-o-y. Central banks seemed to indicate early in the month that monetary policy easing may be over and the US Federal Reserve (Fed) put out mixed signals about a possible tightening at its September policy meeting ahead of the event, but when the meeting came it was another example of finding cause not to tighten while talking up the possibility of tightening soon.
Returning to economic data released over the past month in the United States economic growth according to the final estimate of Q2 GDP rose at 1.3% annualised pace from 0.8% in Q1, but was weighed down by a large detraction to growth from falling inventories. Consumer spending was very strong in Q2, up more than 4% in annualised growth terms. Most likely strong consumer spending and attempts by businesses to rebuild depleted stocks will promote much stronger GDP growth in Q3 (data due in late October), probably around 3% in annualised growth terms.
August economic readings were mixed strength but were still consistent with stronger Q3 GDP. Home building activity still looks very strong with housing starts up 5.8% m-o-m after a 1.4% lift in July. The September National Association of Homebuilders’ survey also showed a very strong result, 65 compared with 60 in August. On the softer side, August retail sales, -0.3% m-o-m, and industrial production, -0.4% m-o-m, were disappointing as too was growth in non-farm payrolls, up 151,000 compared with a 275,000 gain in July. It was the sign that there was still some slack in the US labour market that led the Fed to pause again at its September policy meeting, although a growing minority of voting policy committee members voted for a hike, three committee members against seven for staying on hold. Fed Chairman Yellen’s post-meeting press conference also implied that the Fed is closer to hiking either in November or December.
In the world’s second biggest economy, China, there were signs in August economic data that growth may be stabilising. Exports fell less-than-expected in August by 2.8% y-o-y and compared with -4.4% in July. Industrial production improved to 6.3% y-o-y from 6.1% in July and retail sales growth accelerated to 10.6% y-o-y from 10.0% in July. Growth in urban fixed asset investment spending, the single biggest contributor to economic growth in China, rose 8.1% y-o-y in August, the same as in July. Growth in fixed asset investment spending is still being driven almost entirely by public sector spending although fast rising house prices, up 9.2% y-o-y in August, may prompt more private sector property development late this year and early in 2017. China’s policy makers continue to face difficulties balancing the need to promote growth in the near-term with the need for reform that reduce property speculation, unstable bank lending practices, concentration of economic power in inefficient and in many cases financially weak state-owned enterprises. The challenges of managing these conflicting policy requirements are straining political relationships at all levels of the governing communist party in China presenting an element of political risk to China’s economic outlook.
In Europe, modest economic improvement is showing signs of capping out. Combined business and consumer sentiment pulled back more-than-expected in August to 103.5 from 104.5 in July. The small rise in annual inflation and steady fall in Europe’s unemployment rate evident through much of 2016 so far seemed to stall in August for the inflation rate – steady at 0.2% y-o-y – and in July for the unemployment rate, steady at 10.1%. At the same time as European data is starting to look less promising the ECB has started to indicate that it may be reaching the limits of what it can achieve with monetary policy. Meanwhile, concerns about Britain’s divorce proceedings with the European Union are still to start formally but seem set to re-open areas of uncertainty about the future of the EU when they do.
In Australia, Q2 GDP was quite strong, up 0.5% q-o-q and 3.3% y-o-y. National income growth was strong too boosted by a lift in the terms of trade (export prices relative to import prices). There were elements in the Q2 GDP report, however, that point to less strong growth ahead. Spending-based GDP was boosted by a sharp lift in government spending contributing 1.0 percentage point to GDP growth in the quarter. Most likely that strength will reverse in Q3. The big lift in the terms of trade in Q2 also looks temporary with signs of fading strength in key commodity prices showing through again in Q3. Also the fading contribution to growth from housing activity and household consumption spending looks set to continue as the heavily indebted household sector struggles to juggle its budget to meet the costs of very expensive housing.
Australia’s monthly economic readings are also mixed-strength at best and are not consistent with elevated GDP growth. Retail trade was unchanged in July after rising only 0.1% m-o-m in June and 0.2% in May. Employment fell by 3,900 in August after rising by 26,200 in July and even though the unemployment rate fell to 5.6% from 5.7% there are features of the labour force data through 2016 so far – notably falling full-time employment and no change in paid hours worked – that point to risk of the unemployment rate starting to rise again before long. Parts of the housing market have reignited after the RBA’s May and August rate cuts, but renewed strength in home building approvals, up 11.3% m-o-m in July with private multi-occupancy approvals, up 23.0% m-o-m, threatens to add to potential over-supply in Melbourne and parts of Sydney adding to the severity of the down-turn in housing when it arrives.
The RBA left the cash rate unchanged at 1.50% at its early September policy meeting and is showing signs that it may stay on pause for some months in the minutes of that meeting and in speeches by various senior officials since, including the first parliamentary testimony by new Governor Lowe. Even if inflation stays very low in the Q3 CPI report due in late October it seems that the RBA is prepared to wait and see how the economy is faring over the next few months before easing policy further. One risk with this policy course is that it becomes a de facto tightening as the Australian dollar trades firmer than would otherwise be the case and bank funding costs rise placing pressure on the banks to lift their lending rates. If this quasi-tightening effect occurs, it will reinforce the forces drifting economic growth lower. We still see the RBA cutting the cash rate again, but the timing is more likely mid-2017 (in May or June), rather than in November this year as we previously thought likely.