Tuesday, 3 November 2015
The third quarter of 2015 was dominated by concerns about global economic growth and whether the US Federal Reserve (the ‘Fed’) would initiate the most anticipated start to a US interest rate hiking cycle in living memory.Global growth concern centred on weak activity data out of China. Concerns were that a sharper than expected slowdown in the world’s second largest economy would precipitate a slowdown in global economic growth.While growth in manufacturing and fixed asset investment has slowed appreciably in recent months, the service and retail spending sectors have performed relatively well. Furthermore, the residential property market continues to stabilise, a condition we always thought was a necessary precursor to a stabilisation in the broader economy. The recent correction in the domestic share market appears to have had little impact on economic activity.
The Chinese Government continues to support the economy through a range of monetary, fiscal and liquidity measures. This will likely see the economy stabilise into the end of the year.Economic conditions remain mixed through the rest of the emerging economies. Brazil’s recession deepened in the second quarter of the year and Standard & Poor’s downgraded its sovereign credit rating. This put further downward pressure on the Brazilian real which will likely see inflation move higher despite the recent aggressive tightening in monetary conditions.
India remains the stand-out emerging market performer. Despite growth under-shooting expectations in the second quarter, we continue to believe continued structural reform should see India’s growth rate settle in the 7.5 - 8.0% range over the next year or two. At the same time, inflation is tracking lower giving the Reserve Bank of India scope to continue lowering interest rates.In the United States the domestic economy continues to grow at a solid 2.0 - 2.5% pace. However, despite the condition for further improvement in the labour market before raising interest rates being (arguably) met, concerns about global growth and financial market volatility were enough for the Fed to leave interest rates on hold in September.More recent comments from the Fed suggest a rate rise is still coming, it’s simply a question of when. December now seems the most likely option although that will require continued solid domestic data and continued signs of stabilisation in China. If neither of those conditions are forthcoming, interest rate ‘lift-off’ could be postponed into 2016.
The Eurozone continues to grow at a modest pace with annual growth of 1.3% in the year to June. While still low, 1.3% still represents the fastest annual rate of growth since 2011. Given current monetary accommodation, we expect a further modest improvement in growth in the period ahead. Indeed, recent improved credit growth is consistent with the story of continued modest improvement.The question for the European Central Bank (‘ECB’) is the extent to which growth will be sufficient to provide a meaningful and sustainable increase in inflation. On that the jury remains out. We expect the ECB’s asset purchase programme to run its full course to September next year.
Economic activity in Japan remains patchy at best. GDP fell an annualised -1.2% in the June quarter. Consumption was weak despite better labour market data, and exports were weaker still. Capital expenditure was disappointingly weak. The Bank of Japan lowered it’s growth and inflation forecasts recently but it is likely still too optimistic on both fronts making further monetary easing likely.The Australian economy is still experiencing a very challenging transition with the end of the mining investment boom. Australia’s economic growth has been modest with real GDP expanding by only 2.3% for the year to March 2015.
Australia’s Reserve Bank (‘RBA’) has responded to this milder economic activity by lowering the cash interest rate to an historical low of 2.0%, where it has been since May 2015. Australian economic activity should gradually pick up speed as we head into 2016. Low interest rates, rising wealth and solid population growth should support consumer spending and housing. Non-mining investment should gradually rise and serve as a counterweight to falling mining investment.
The New Zealand economy has just come through its weakest six month period since the first half of 2013. The good news is we have seen a significant easing in financial conditions which will support growth in the near term and generate a modest pick-up in activity towards the end of the forecast period.The negatives for the economy have outweighed the positives over the quarter. Dairy prices fell sharply before the more recent recovery (albeit on lower volumes), the residential component of the Christchurch reconstruction appears to be peaking, business and consumer confidence have fallen further and the global economic outlook has become somewhat darker, bringing with it a fair degree of market volatility which has in itself not helped sentiment.Offsetting the negatives for the economy are the fact that population growth remains strong as net inward migration continues to rise. Auckland is replacing Christchurch as the centre of growth for residential construction, and service exports (tourism) are strong. In addition, the Reserve Bank of New Zealand (‘RBNZ’) is cutting interest rates, and appears likely to cut them further, and the tradeweighted exchange rate is around 15% lower than the peak in April, helping deliver a significant easing in overall financial conditions.With the economy currently going through a weak patch, we have lowered our growth forecasts and now expect GDP growth of 2.2% in calendar year 2015. We expect 2016 to also come in at 2.2% but we see some modest upside in 2017 to 2.5%. That sounds weak, and it certainly is relative to our recent past, but by developed world post-Great Recession standards, we think this still represents a solid performance.Source: AMP Capital
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