- Inflation continues to creep higher and is close to or at 2% in major developed markets, although core measures of inflation remain below target
- Despite slower-than-expected March-quarter growth in the US, there are signs of a stronger June quarter, including improved consumer spending and business investment
- Tariff threats between the US, China and Europe are yet to be resolved and risk escalating into a trade war that could damage global trade
- In Italy, the political impasse was finally broken, with a coalition government formed between the two popular right parties, Lega Nord and the Five Star Movement
- Japan’s economy contracted in the March quarter, bringing into question the efficacy of the Bank of Japan’s quantitative easing measures.
Geopolitical tensions, including an ‘on-again, off-again’ tariff war between the US, China and Europe were the cause of uncertainty for markets through May. The US and China agreed to a ‘trade war hold’ before tariff threats re-emerged once again from the US, culminating in June’s heated G7 meeting. Globally, inflation continues to inch higher, with renewed pressure on central banks to tighten rates, while data points to stronger economic growth for the June quarter.
The Reserve Bank of Australia (RBA) left the cash rate anchored at 1.5% at its June meeting, and judging by the most recent Statement on Monetary Policy, it is unlikely to change course any time soon. Ongoing low wages growth, uncertainty over the extent and impact of the recent tightening in home lending conditions, and inflation barely in the bottom of the RBA’s target range suggest that it would be premature to begin exiting current accommodative policy settings. However, the broader economic picture remains robust, with March quarter GDP recording annual growth of 3.1%, and labour and business conditions pointing to solid fundamentals.
US March quarter GDP was revised down 0.1 points to an annualised 2.2% according to May’s second estimate reading, missing against the expected reading of 2.3%. Despite the slower-than-expected growth, there are signs of a stronger June quarter, including improved consumer spending and business investment, while January’s income tax cuts are expected to start flowing through to the household and business sectors.
While China’s March quarter GDP growth was a promising 6.8% year-on-year, indicators of manufacturing output growth and business investment remain subdued. China’s official manufacturing PMI rose in May from 51.4 to 51.9, indicating a modest improvement in growth, however the unofficial Caixin PMI, which measures output from smaller firms, was steady at 51.1.
Concerns over slowing world trade growth and rising geopolitical tensions, together with extreme weather conditions, have combined to undermine economic activity across the European continent. The spectre of a trade war with the US also places major European economies in an uncertain position, with Germany particularly vulnerable given its large trade surplus in manufactured goods, including automobiles.
June’s flash March quarter GDP reading confirmed that Japan’s longest run of economic expansion since the 1980s has come to an end, with output contracting -0.6%. The result is a serious blow to Prime Minister Abe’s reflationary policies (known as Abenomics) and the Bank of Japan’s ultra-easy monetary policy, although some economists point to the drop in the rate of quantitative easing over recent months.