Global economic growth prospects are brightening, led by the US economy which although in its longest recorded economic expansion still seems to have further to run at greater pace in 2020 than in 2019. On latest economic readings and surveys, growth also looks set to quicken in much of Asia, including China and Japan, Europe and possibly Australia as well. There have been several upside surprises in key data released in several major economies so far in December. Also, political headwinds to growth have diminished (with the notable exception of China and Hong Kong) in December, with a first stage trade agreement imminent between the US and China and the British election result paving the way to Brexit on 31st January. Another factor that bodes well for growth prospects in 2020 is lack of untoward upward pressure on inflation, keeping most central banks either side-lined or in policy easing mode.
During December, the US evidence of basing has accumulated and a lift in pace of growth in GDP. Q3 GDP on revision has lifted to 2.1% annualised with household spending, the mainstay of US growth improving to 3.2% annualised and showing signs of accelerating in Q4. The labour market is very strong supporting household spending. The latest non-farm payrolls report for November showed payrolls up 266,000 after an upwardly revised 156,000 lift in October. Annual growth in average hourly earnings was 3.1% y-o-y in November, close to a decade high. The unemployment rate edged down in November to 3.5%, the lowest rate since 1969.
Housing activity at the leading edge of US growth is also showing signs of lifting, assisted by low home mortgage interest rates. Home building permits rose 1.4% m-o-m in November after increasing 5.0% in October. Home building starts rose 3.2% m-o-m, after increasing 4.5% in October. Home builders in the US have become very optimistic and the National Association of Homebuilders’ index lifted from a high 71 reading in November to a very high 76 in December. The US economy looks set to enter 2020 with increasing home building activity and a household sector able and willing to spend more freely. At the same time, one major issue causing heightened uncertainty among US businesses, the trade war with China, is easing.
Adding to the brightening US economic outlook, the US Federal Reserve (Fed) is likely to leave the Funds rate either unchanged at the current 1.75% or lower it in 2020. Economic recovery in the US has been unusually long and the unemployment rate is very low however, there are still no signs of a lift in unit labour costs capable of pushing US inflation into territory that might cause the Fed to resume hiking the Funds rate. US bond yields might continue their current modest upward correction with improving US economic growth, but it is unlikely the lift in bond yields will be large without any signs that the Fed will hike rates. At its December policy meeting, the Fed left the Funds rate unchanged and indicated in its revised forecasts and commentaries that there is no likelihood of any policy tightening in the near term.
China’s economy has also shown better growth signs in response to earlier monetary and fiscal stimulus. The official manufacturing purchasing managers’ (PMI) index lifted to 50.2 in November from 49.3 in October while the non-manufacturing PMI rose to 54.4 from 52.8 in October. November fixed asset investment rose 5.2% y-o-y, the same as in October, industrial production was up 6.2% y-o-y from 4.7% in October and retail sales, up 8.0% y-o-y from 7.2% in October both accelerated more than expected. The stage one trade agreement between China and the US should help China’s international trade to stabilize. China still faces significant problems including how to deal with continuing protests in Hong Kong and at home excessive corporate debt, but one constant is the Government’s imperative to support economic growth.
In Europe, annual economic growth has stabilized a touch above 1.0% y-o-y and past policy easing by the European Central Bank with signs that some European countries are close to providing more budget stimulus suggests stronger European growth in 2020. Passage of UK legislation last week means Brexit will occur on 31st January. Britain will then enter negotiations with Europe for a trade deal. While these negotiations occur, it is likely that both Britain and the EU will try to offset potential damage to economic growth with more government spending. In our view, reduced uncertainty post-Brexit and easier policy settings in Britain and EU has shifted the balance of risk for European economic growth to the upside rather than the downside in 2020.
In Australia, the economic outlook took a gloomier turn in October and November reflected in downgrades to both the RBA’s economic forecasts in the early-November quarterly Monetary Policy Statement as well as Treasury’s mid-December budget review. Both the RBA and Treasury reduced forecasted annual wage growth to staying below 3% y-o-y for the foreseeable future. Weaker wages growth in turn was likely to keep growth in household consumption spending subdued throughout 2020. Recent monthly retail sales readings have been consistent with the revised official household consumption forecasts. Retail sales were flat in October after rising only 0.2% in September, showing no signs of any lift from tax cuts; lower mortgage rates or fast rising house prices.
There is still a chance that household spending may accelerate. Anecdotal evidence suggest that pre-Christmas retail spending has been stronger than expected. Importantly, the latest labour force reading for November was surprisingly strong. Employment rose 39,900, more than double expectations and the national unemployment rate unexpectedly edged lower to 5.2% from 5.3% in October. The unemployment rate probably needs to fall well below 5% to place greater upward pressure, but it is at least edging in the right direction. Also the lift in house prices, in Melbourne and Sydney in particular, is showing no signs moderating. A better labour market plus still fast rising house prices could promote stronger retail sales.
The RBA left the cash rate unchanged at 0.75% at its early December policy meeting and will not meet again until the beginning of February. Our view has been that there are enough signs of softness in domestic spending in Australia to warrant the RBA cutting the cash rate again in February, but it is a close call. The stronger November labour force report if reinforced in the December report followed by signs of improvement in retail sales in November and December could limit, perhaps even eliminate the need for the RBA to cut the cash rate below the current 0.75%. Like the RBA, we are keenly watching the data over the next six weeks and at this stage there is just the hint of a turn for the better.
Wishing all readers the best for Christmas and New Year. The next report will be on Monday 6th January 2020.