Updated: Apr 29
Global economic growth is expected to accelerate modestly in 2020 notwithstanding a range of challenges from heightened political tension in the Middle East and the coronavirus outbreak, to managing the aftermath of the bushfire crisis in Australia. As always, there is catalogue of potentially growth crimping challenges, but the latest economic readings around the world mostly point to global growth lifting compared with 2019. Growth is still improving with spare presenting little likelihood of a lift in inflation of an order to concern central banks. They for the most-part are keeping the monetary spigots wide open. There is also greater likelihood that the central banks will be joined by governments loosening budgets to promote growth including in Australia.
Turning to the signs of stronger growth in recent data releases, in the US almost all indicators of housing and consumer spending released in January have been strong. The National Association of Homebuilders’ Index was 75 in January after 76 in December, both unusually high readings. Housing starts in December rose 16.9% m-o-m after lifting 3.2% in November. December existing home sales rose by 3.6% m-o-m. November pending home sales rose 1.2% m-o-m. December retail sales rose by 0.3% m-o-m with a particularly strong 0.7% lift in core sales.
Supporting the strength in US housing and consumer spending, the US labour market continues to strengthen with non-farm payrolls up 145,000 in December after gaining 256,000 in November and the unemployment rate still at a 50-year low 3.5%. Importantly, although average hourly earnings are rising at close to 3% y-o-y, unit labour costs are still contained. US producer prices rose 1.3% y-o-y in December, while CPI inflation at 2.3% y-o-y in December looks a touch high. The producer price pipeline and contained unit labour costs suggest little chance of inflation pushing any higher. The Federal Reserve (Fed) meets later this week for the first time in 2020 and is likely to maintain the funds rate unchanged at 1.75% with a message that although the US economy is performing relatively well, there is no need for less monetary accommodation in the near term.
After the Fed meeting, the first reading of US Q4 GDP is due late this week and is expected to show annualised growth of around 2.1% the same as in Q3. The main contributor to growth in Q4 is likely to be strong with household spending outweighing softness in business investment spending and exports.
China’s GDP growth rate in Q4 came in as expected at 6.0% y-o-y down from 6.2% in Q3 and the slowest annual growth rate in 30 years. In the near-term, growth may improve a little in China responding to policy stimulus during 2019, but China’s now advanced stage of economic development points to inevitable attrition in growth longer-term. China’s December economic readings were mostly a touch better than expected. Exports lifted to +7.6% y-o-y from -1.3% in November and the first-stage trade agreement signed off in January with the US, which should help stabilize trade. Fixed asset investment spending improved slightly in December to +5.4% y-o-y from +5.2% in November while retail sales growth was steady at +8.0% y-o-y, the same as in November. Industrial production, however, slipped to +5.7% y-o-y from +6.2% y-o-y in November. The list of economic challenges facing China is extensive and includes industrial over-investment; too much corporate debt; too much household savings and too little household spending; and population capping out and starting to decline. The headwinds to China’s longer-term growth prospects imply that whilst China may contribute to near-term improvement in global growth, it is more likely to become a brake on longer term.
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 suggest stronger European growth in 2020. Britain enters the first stage of Brexit later this week with increasing hope that the still comparatively lengthy divorce proceedings which lie ahead will be less disruptive to British and European growth prospects than previously indicated. Several leading indicators of European economic activity have taken a brighter turn in January. Among them the January ZEW economic sentiment survey lifted to +25.6 from +11.2 in December and the January manufacturing PMI rose to 47.8 from 46.3. The European Central Bank at its January policy meeting left rates unchanged but continues to focus on potential downside risks to European growth. In subsequent, briefing by President Christine Lagarde continues to put the call out to European governments that are able to commit to fiscal stimulus.
In Australia, despite the devastating bushfires, the economic outlook took a brighter turn in January after a run of better than expected economic readings. November retail sales jumped 0.9% m-o-m (attributed mostly to strong Black Friday sales); home building approvals lifted 11.8% m-o-m and trending higher, the value of owner-occupier home loan commitments rose 1.8%, which is the sixth consecutive monthly increase totaling 10% y-o-y; the trade surplus was bigger than expected at $A5.8 billion, primarily due to a 2% lift in exports and up from $A4.1 billion in October. Back in December the November, labour force reports was stronger than expected with employment up 39,900 and the unemployment rate unexpectedly falling a notch to 5.2%. The latest December labour force report was again stronger than expected with employment up 28,900 and the unemployment rate falling another notch to 5.1%.
Whilst the economic reports have been surprisingly strong, consumer and business sentiment readings have remained soft and the extensive bushfire damage will detract from economic growth in the near-term. The bushfire crisis has also provided catalyst for a change in Government Budget thinking from prioritizing return to Budget surplus and retiring Government debt to spending whatever it takes to help bushfire affected areas recover. Australia is joining the ranks of the countries starting to provide fiscal stimulus, promoting growth. In Australia’s case, the money will start to flow almost immediately.
For the RBA, the recent economic reports paint a picture of slightly better growth and labour market conditions than forecasted in its November Monetary Policy Statement. There may not be enough evidence to warrant an upgrade to the RBA’s economic growth forecasts in the next Monetary Policy Statement due the first Friday in February, but there have been enough positive surprises to make it very difficult to argue the need for a further rate cut at the policy meeting the first Tuesday in February. Also, the data readings would need to take a noticeable and consistent turn for the worse to bring the prospect of further monetary easing back into play. At this stage, we think its unlikely that the need for further monetary easing will come back into play any time this year, especially with signs of improvement in global economic growth and the Government turning on budget spending to promote bushfire recovery. We see the cash rate staying at 0.75% throughout 2020.