The regular monthly economic indicators of the health of the US and Chinese economies have turned mixed over the past month or so leading many analysts to warn that global growth may weaken. Our view is the opposite of the weaker growth consensus. We see US economic indicators taking a firmer turn over the next few months, based on strength in recent leading indicators of economic activity. In China, the softer patch in the regular data may persist a little longer than in the US, but we are very encouraged by the stated policy plans of China’s leadership to reform approval processes for private businesses and shift emphasis to business investment rather than public investment.

Australia has been caught up in a more pessimistic view of the future too, reinforced by downgrades to official RBA and Treasury economic forecasts on concerns about a pullback in investment spending in the resource sector over the next year or so. Our view is that pessimism about Australia’s growth outlook is misplaced given signs that Australian households are starting to spend more freely.

Returning to the US outlook, manufacturing activity appears to have slipped in April (industrial production was down 0.5% in the month, with manufacturing production down 0.4%) and still looks soft in May (the May Empire-New York State manufacturing index fell below the zero expansion/contraction threshold to – 1.43 and the Philadelphia Fed index fell even further to -5.2). Set against softer manufacturing activity, spending by US households looks set to rise. The mid- May University of Michigan consumer sentiment index rose more strongly than expected by 7.3 points to 83.7. The “current conditions” component of the index rose even more strongly by 7.6 points to 97.5, a new high reading for the current economic recovery in the US.

The consumer sentiment index is pointing to stronger US retail sales, but it is not the only leading indicator that has taken a stronger turn. The April NFIB small business index jumped to 92.1 from 89.5 in March, the May National Association of Homebuilders’ index rose to 44 from 41 and April housing permits lifted very strongly by 14.3% indicating that weakness in housing starts in April will be short-lived. Underpinning strength in household spending intentions is a very strong

increase in household wealth over the past year on near double-digit annual growth in house prices and a 32% lift in the US equity market over the past 12 months. We see stronger household spending lifting all boats over coming months including US manufacturing.

In China, April activity indicators were mostly a touch shy of market expectations, although it is a little hard to be overly concerned – as the market seems to be – about industrial production up 9.3% y-o-y, retail sales up 12.8% y-o-y and urban fixed asset investment up 20.6% y-o-y. On those numbers China should manage GDP growth comfortably above 7.5% y-o-y. Those pessimistic about China’s growth prospects argue that the authorities are still struggling to contain property price inflation and deal with issues related to the shadow banking system and that their potential actions may haul down growth. Despite these near-term policy challenges we are encouraged that the authorities remain committed to economic reforms – reducing the primacy of government investment spending and reducing impediments to business investment spending – that provide reason to expect more sustainable and strong medium to longer term Chinese GDP growth.

For Australia, our China view that growth will resume a relatively stronger track medium-to-longer term means that we also see a less sustained pullback in commodity prices and resource sector investment spending than is built into official economic forecasts. We also see near-term Australian growth supported by stronger household spending. In Q1 2013, retail sales lifted by 2.2% q-o-q, the strongest rise in six years, and sufficient to contribute 1.2 percentage points to Q1 GDP growth (out on 5th June). Housing activity appears to be lifting very strongly too. The latest weekend auction clearance rate in Australia’s biggest housing market, Sydney, was the highest yet at 79%. Owner-occupier housing finance commitments have also started a sharp acceleration, up 5.2% in March, after increasing by 2.1% in February and 0.9% in January. We see a run of mostly firmer Australian economic indicators over the next few months, which if it happens as we expect will see a marked and positive market reappraisal of Australia’s growth prospects.