Last week we issued an economic watch list for the next month or two covering Q3 GDP growth in major economies; inflation; employment /unemployment; and likely moves by central banks, including our own RBA. We expressed a view that some of the more pessimistic views swirling in markets relating to early onset of recession or worse a period of low growth and higher inflation – stagflation – seemed to us unlikely to occur and it is worth watching various economic reports between now and year-end that we thought would be likely to scotch the more pessimistic views. The economic watch list reports started to roll out last week and seem to support our view that the current phase of strong economic growth still has a way to run.
The Q3 report from China showed GDP growth slipping a touch to 6.5% y-o-y from 6.7% in Q2, but essentially it is still a firm report and the September monthly economic readings released the same day indicate firm momentum in exactly the parts of China’s economy that the authorities want to see grow to offset planned weaker growth in industrial production and weaker future growth in China’s exports imposed by the trade war initiated by the United States. The two parts of China’s economy that grew by more than analysts expected in September were fixed asset investment, lifting to 5.4% y-o-y in September from 5.3% in August and retail sales accelerating for a second consecutive month to 9.2% y-o-y in September from 9.0% in August.
There are clear signs that infrastructure spending and retail spending are picking up pace. There is a growing likelihood, albeit one not recognised yet by many analysts looking for downside risks to China’s growth story, that China will cope with the trade war without too much negative impact on GDP growth. The first building blocks are in place for China to grow between 6-6.5% y-o-y in 2019.
US Q3 GDP is due for release late this week and the consensus forecast is that it will come in around 3.3% annualised pace from 4.2% in Q2. The US Q3 company earnings reporting season is off to a strong start too and earnings are running close to 21% y-o-y higher, the strongest lift in eight years. There are plenty of warnings about what might go wrong in the future, but a near-fully employed household sector with wages growth beating inflation combined with a corporate sector still generating bumper profits and US inflation still trickling rather than racing higher point to strong US growth extending in to 2019.
At home in Australia a sagging housing market combined with pockets of high household debt are causing many analysts to forecast softer growth ahead. Yet Australia continues to race towards full-employment according to the economic data. Employment rose 5,600 in September consolidating the huge 44,600 gain in August and reducing the unemployment rate to a six-year low 5.0% from 5.3% in August.
It is worth noting that the unemployment rates in New South Wales and Victoria fell to 10-year low-points of respectively 4.4% and 4.5%. In the case of New South Wales there have been only two lower monthly unemployment readings (4.3% in March 2008 and 4.2% in April 2008) since the data were first collected in the current format more than 40 years ago.
As mentioned last week, the RBA with economic forecasts on the strong side of most analysts’ forecasts, will need to revise even stronger some of their forecasts when they release them next in the quarterly Monetary Policy Statement on Friday 9th November. In their last Monetary Policy Statement they had the national unemployment rate at 5.5% through to late next year before declining to 5.25% in 2020. Quite clearly the unemployment rate is reducing more quickly than they thought likely and the attendant risk is that wages growth may rise faster than the very gradual pace they expect too.
What is clear is that unemployment is now low in Australia and looks like staying low for some time. There is an increasing chance that the pace of wages growth will lift in the tight labour market. Low unemployment and higher wages growth will help to counter downside risks to the economy resulting from soft housing and high household debt.
On our near-term watch list for Australia are the Q3 CPI next week (probably showing headline annual inflation close to 2.1% y-o-y recorded in Q2); the RBA’s Monetary Policy Statement in early November with upwardly revised growth forecasts and downwardly revised unemployment rate; Q3 wages growth in mid-November (probably another small rise to 2.2% y-o-y); and Q3 GDP growth likely to be comfortably above 3% y-o-y for a third consecutive quarter.
The downside from a much brighter economic outlook is that interest rates cannot stay as low as they have been. Already an emergency-low 1.50% cash rate looks crazy with the economy just about at full-employment. Yet it is still likely to take the RBA a few more months before it starts to hike the cash rate.