Economic update EOFY 18/19

The first quarter equity market rally continued into April in light of dovish Central Banks and improving Chinese data. Cuts to Germany’s growth forecast brought concerns around Eurozone weakness. The Brexit deadline received an extension but yet again the outcome remains uncertain.

Australia

The Reserve Bank maintained its wait-and-see approach of both how global themes and conditions back at home develop, leaving the cash rate unchanged in April. This comes as a disappointing headline CPI was reported to be flat in the March quarter at 1.3% (0.19% growth, below the consensus forecast of 0.2%), making it the slowest annual pace since the September quarter of 2016. The six-month annualised growth rate in core inflation sits at 1.2%, well below the RBA’s target band of 2-3%, suggesting the case for a rate cut grows.

The labour force delivered stronger than expected results over March. Slowing momentum elsewhere in the economy has not reached the jobs market, which jumped by 25.7k (48.3k being full-time jobs). The unemployment rate inched up to 5.0% in March from 4.9% in February, attributed to a 0.1% rise in the participation rate to 65.7%.

Consumer sentiment lifted back to a cautiously optimistic 100.7 in April from 98.8 in March, supported in part by the Federal Budget. Housing price weakness still weighs on the minds of many, with dwelling prices declining further in April (-0.5%) across the capital cities. This comes as little of a surprise, given housing credit continues to experience limited growth, rising by a soft 0.2% in March, bringing the annual rate to a record low of 4.0%.

US

The US Federal Reserve cited improvements in global growth and financial market conditions, describing the US economy as “solid”, adding that there was no case to move rates in either direction. The US President appeared to have differing views, calling for lower rates in the interests of boosting the economy.

Initial reading of March quarter GDP rose at an annualised pace of 3.2%, above consensus expectations of 2.3%, but focus was on the composition of the report, that more than half of the growth was driven by trade and inventories, with the risk that the improvement in net trade will not last and the renewed surge in inventories will be reversed. The ISM manufacturing index lowered to 55.5 in April, from 56.1 in March, but remains above 50, suggesting some softening of expansionary activity.

Employment grew a solid 275k in April from 151k in March – the best result in nine months – and the unemployment rate is at its lowest level of 3.6% since December 1969. Consumer confidence as measured by the Conference Board Index lifted to 129.2 in April, coinciding with a pickup in consumer spending. Core personal consumption expenditure (PCE), the Fed’s preferred measure of underlying inflation, was flat in March. In annual terms, the core PCE slowed to 1.6% from 1.7% in February and is below the Fed’s 2% goal.

Asia

Though there remains concerns regarding the sustainability of China’s credit-fuelled growth, the earlier implemented government stimulus is taking effect, which saw the nation’s economy grow at a stronger than expected 6.4% pace in the first quarter.

CPI lifted from 1.5% to 2.3% in March, driven largely by a pickup in food prices, particularly pork which has seen African swine fever affect supply. PPI similarly picked up, corresponding with an improvement in economic activity.

China’s trade surplus widened from US$32.4bn in March to US$13.8bn in April. While exports fell 2.7%, domestic demand has strengthened as indicated by a 4.0% increase in imports in the year to April – the first annual increase in five months. The Caixin manufacturing PMI fell to 50.2 from 50.8 in the month prior, as did the non-manufacturing PMI, easing to 54.3 from 54.8. In contrast, the Caixin services PMI rose 0.1 points to 54.5 in April. The PMI indicators suggest some softening of activity, but remains in expansionary territory.

The Bank of Japan (BOJ) held monetary policy steady and reiterated its intention of maintaining current low levels “at least until the spring of 2020” in light of the global uncertainties. This comes as the BOJ cut its economic growth and inflation forecasts for the fiscal year starting in April 2020.

Japan’s trade balance moved into deficit territory of JPY177.8bn in March adjusted term. Weak demand from China continued to impact Japanese exports, which fell 2.4% year-on-year in March. Imports rose 1.1% over the same period. Industrial production contracted in March (-0.9%) and has been downgraded to being “in a weak tone recently”. Weaker data, including the lift in the jobless rate from 0.1% to 2.5% in March, contrasts with stronger retail sales (+0.2%) and Japanese CPI rising to a 4-month high of 0.5% year-on-year in the same period.

Europe

Following an ECB downgrade of growth and inflation forecasts in the previous month, monetary policy was left on hold as expected. Officials and policymakers remain sceptical the European economy will improve in the second half of this year. Data continued to confirm weakness in the region with industrial production falling by 0.2% in February. Core inflation lifted to 1.2% in the year to April, but may be skewed due to a later than usual Easter.

German output declined a further 0.4% in February, from a 0.2% contraction in the month prior. This comes as the German government cut its forecast for the region’s largest economy to 0.5% in 2019, citing a challenging environment for trade.

More recent Eurozone sentiment indices showed deterioration. The economic sentiment index fell to 104 in April from 105.6 in March, marking the tenth consecutive decline. The industrial confidence index dropped to -4.1, from -1.6 previously. The business climate indicator for the region also fell to 0.42 from 0.54 in March.

The Brexit leaving date was extended to 31 October 2019 with an agreement in place that the UK must hold European elections, otherwise it will need to leave on 1 June. Despite the uncertainty, UK data came back strongly with industrial production rising 0.6% in February, and construction output rising 0.4%, well above expectations. March Inflation only just missed expectations with headline CPI reading at 1.9%. The UK labour market proved strong as the unemployment rate remained at a steady low of 3.9% in the three months to February (the lowest since 1975). The April reading of the services PMI lifted to 50.4 and the composite PMI to 50.9.

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