- Softer US inflation and PMI figures have dimmed the growth outlook, although further labour market tightening may avert a Fed rate cut for the time being.
- The trade situation remains the key issue for the global economy, with uncertainty affecting investment and bolstering the case for monetary easing.
- European manufacturing continues to decline, while a rise in German unemployment spelled further concern for the eurozone’s largest economy.
- China’s weakening manufacturing sector and an economy at risk of further trade disruption has hastened the authorities’ decision to deploy additional stimulus measures.
- The RBA cut the cash rate again at its July meeting to 1.00%, proving its willingness to combat weak inflation expectations and protect against downside risks.
The big news in Australia is the RBA’s switch to rate cutting mode, with two cuts to the cash rate over June and July to a record low 1.00%. The minutes of the June meeting point to concern about the US-China trade dispute, while domestically the decline in dwelling investment has had an impact on economic growth and households remain constrained by low wages growth and falls in home prices. In particular, the RBA noted there is still spare capacity in the labour market, with modelling suggesting that the rate of unemployment consistent with stable inflation (known as the NAIRU, or Non-Accelerating Inflation Rate of Unemployment) has fallen in recent years to around 4.5%. When the unemployment rate rose to 5.2% in April and held steady in May, the case for easing became clearer.
Recent economic data points to a deterioration in global economic growth, largely a result of softer US figures. Sentiment improved following a trade truce between the US and China, although it is yet to be seen how long markets will enjoy the reprieve. Central banks have shifted to an easing bias, and the RBA has already implemented two successive rate cuts in June and July.
The G20 summit in late June brought some peace to trade tensions as Xi and Trump agreed to restart talks, but the issue has clearly undermined confidence and expectations of a recovery in growth in the second half of 2019. The US has already placed tariffs on US$250 billion worth of Chinese products and has threatened tariffs on $325 billion more, while China in turn has set tariffs on $110 billion worth of US goods and is threatening additional measures that would affect US businesses in China.
Inflation in the eurozone was 1.2% year-on-year in June, steady on May and down on April’s result of 1.7%. Core inflation rose from 0.8% to 1.1% but remains obdurately low. In France, modest growth in the service sector and stability in manufacturing growth foreshadow moderate GDP growth over the June quarter. In Germany the services sector continues to grow on the back of strong domestic demand, while manufacturing is contracting at the fastest pace since 2012, with sector employment falling the most in over six years.
The Chinese economy remains soft by historical standards and exposed to the escalating trade war and weaker global trade growth. Industrial activity is very subdued despite the range of stimulus measures undertaken over the past year. The official PMI, which had begun to move back into expansion in March (albeit barely at 50.5), slipped back to 49.4 in May and remained steady in June. The Caixin PMI fell in June from 50.2 to 49.4 and industrial production fell from 5.4% to 5.0%.
Japan’s March quarter GDP growth of an annualized 2.2% rate was promising and certainly higher than the market’s initial expectation of zero growth for the period. Compared to the initial flash estimate, capital spending was revised upwards but public investment and housing investment figures were revised down. Over the year to the end of the March quarter, GDP grew 0.9%, but with a declining population, GDP per head growth will be significantly higher.
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