- The global economy is maintaining momentum and inflation is gradually moving higher in line with central bank targets
- Growth in US average hourly earnings is still not showing conclusive evidence of a sustained pickup in wages
- The threat of a trade war between the US and China is creating significant uncertainty for markets
- Euro area inflation was 1.4% in March, up from 1.1% in February but still well below the European Central Bank’s (ECB) target
- The Australian economy continues to improve, but the Reserve Bank of Australia (RBA) is wary of the impact of interest rate rises on the household sector.
Despite leaving the cash rate on hold at its March meeting, the RBA continues to expect labour markets to tighten globally, and for central banks to get on the front foot by withdrawing stimulus. Australia’s labour market continues to tighten, and the unemployment rate was unchanged at 5.5% and has been steady for the past six months.
While underlying economic data is broadly positive, markets remain concerned about the prospect of inflation as well as the potential for a trade war between the US and China. Shares continued to sell off in March as investors favoured bonds, property and defensive sectors.
The prospect of a trade war has been the cause of some consternation for markets over the past month, with China announcing a retaliatory 25% levy on a range of US products, including soybeans, cars and whiskey. While US steel and aluminium hardly represent the new economy, it is the response from US trade partners that poses the greatest uncertainty.
Economic data for the early part of 2018 has been mixed, with manufacturing Purchasing Managers’ Index (PMI) failing to break out of the low 50s, while exports, industrial production and retail spending data have surprised on the upside. Producer prices continue to outpace consumer prices, although the annual rate has dropped.
Despite stronger than expected growth throughout the eurozone, the European Central Bank kept its key interest rates on hold in March, although notably dropping its usual commitment to increase the size of quantitative easing if the situation deteriorates.
Although headline gross domestic product growth numbers in Japan have been low in absolute terms, by Japanese standards they have been solid, resulting in a narrowing of the output gap. The Nikkei Japan PMIs suggest a moderating rate of output growth, with manufacturing growth softer but still maintaining an expansionary trend in both output and new orders, encouraging firms to raise employment and input buying.