Four economic events internationally held centre stage last week, the Greek debt negotiations; the run of economic data out of China including Q2 GDP; the semi-annual testimony by Federal Reserve Chair Janet Yellen and the European Central Bank’s policy meeting. My view on each of these events expressed in the article “The chill is not just the weather” was that each event would probably turn out implying downside risk to global economic growth. It seems that I was wrong in my assessment of all four although probably not wrong enough to derail an assessment that the global growth outlook still looks soft.
The Greek debt stand-off did not end with the Greek Prime Minister digging his heels in over the further austerity measures demanded by creditors precipitating a Greek exit from the euro. Instead Greece appears to have accepted austerity measures and privatization of public assets more draconian than those it offered ahead of the resounding “no” vote in its referendum on austerity measures. Greece appears to have a rescue package of sorts, but at the cost of even deeper political division at home and greater debt to be serviced from a faster shrinking economy in the near to medium term. Sharemarkets around the world rallied on the Greek news and the apparent reduction in uncertainty, but the underlying economic issue facing Greece of far too much debt to service from too small an economy has not been resolved, if anything it has worsened.
The data out of China were certainly better than expected. June exports lifted by 2.8% y-o-y against market expectation of a 1.0% fall. June industrial production, up 6.8% y-o-y against expectation of 6.0%; retail sales, up 10.6% y-o-y against expectations on 10.1%; and urban urban fixed asset investment spending, up 11.4% y-o-y against expectations of 11.2%. Q2 GDP came in at up 7.0% y-o-y against expectations all clustered around 6.8% or 6.9%. It could be that China’s economy is responding earlier than expected to extensive stimulatory economic policies adopted over the last few months. Another explanation of the comparative strength in Q2 GDP is that China’s booming share market through much of the period served to boost spending and if this is the reason beware because growth will be weaker in Q3 reflecting the sharp downturn in the sharemarket since its recent peak.
With the erratic forces at play in China’s sharemarket, the positive influence in the pipeline from stimulatory policies and the wholesale reshaping of economic growth drivers by the authorities it is difficult to predict with any degree of confidence how China’s growth rate will pan out over the next year or so. Suffice it to say the omens from industrial commodity prices, a rough proxy for what is happening in China, remain bleak even after the better data reports last week.
Turning to the US Federal Reserve and the European Central Bank both took a “steady as she goes line” rather than highlighting any real concern about the the global growth outlook. In the case of Fed Chair Janet Yellen’s semi-annual monetary policy testimony there was no real change from her comments of recent months. The Fed still believes the US economy has improved enough to start later this year a slow process of normalizing its Funds (cash) rate. Rate moves, including the first one, will be data dependent. In short, the Fed is still saying that it will start raising rates in the next few months even though the data still seems to be encouraging the Fed to hold fire for several more months. Views about when the Fed will actually start lifting rates look set to undulate for a while yet.
The ECB also delivered “a nothing has changed” assessment about the soft growth European growth outlook with return to very mild inflation. As a result, the ECB saw no need to change its official interest rates or the pace and proposed length of QE asset purchase operations.
Bringing all this home to Australia, notwithstanding the international developments over the past week, we still see the RBA needing to adjust its Australian economic growth and inflation forecasts slightly weaker early in August. The inflation forecast is contingent upon the outcome for Q2 inflation due this week which really needs to be no higher than 0.8% q-o-q, 1.7% y-o-y and with underlying inflation readings no higher than 0.6% q-o-q. The soft to lower economic forecasts likely to be published on Friday 7th August imply that the RBA is still likely to consider cutting the cash rate another 25bps to 1.75% at its policy meeting on Tuesday 4th August. Admittedly the confidence level of our August rate cut forecast is not quite as high as it was, but still stands around 65% chance.