Wednesday, March 4, 2015

Data Insight: Australia GDP

Key points from the AMP Capital team in Sydney:
  • Australia's economic growth remained modest in the final quarter of 2014 with the economy expanding by +0.5%.This is only a marginal acceleration of the previous quarter’s +0.4% growth rate. This accords with the RBA’s March meeting statement that Australia’s “growth is continuing at a below trend pace”.
  • There were some positives in the December quarter GDP report. Consumer spending was solid (+0.8%) with the household saving ratio remain elevated at 9.0%.
  • Housing construction is robust (+2.5%). There was  sharp positive GDP contribution from Net Exports (+0.7% to GDP) given solid exports (+1.0%) outweighing the sharp fall in imports (-2.5%). This import slump reflects the end of the mining investment boom curtailing capital imports.
  • However business investment was weak (-0.4%) given the mining downturn while inventories fell sharply (-0.6% percentage point contribution), indicating a degree of caution in the corporate sector. Notably public spending was flat (+0.1) given the Federal Budget’s fiscal consolidation.
  • Australia's real economic growth for the past year now stands at a modest 2.5%.  This growth rate  is well below the past 20 year average of 3.3% and below the 2.8% average for last 10 years. So the Australian economy is recording a “below trend” performance with accompanying mild inflation pressure and a gradually rising unemployment rate. 
  • Given this sub par economic performance , the December quarter GDP result will only reinforce the case for a further easing in monetary policy.  We expect the RBA will cut the official cash interest rate by a further 0.25% to 2.0 % in April or May.

Tuesday, March 3, 2015

India’s budget and China’s rate cut

In my post on India’s Economic Resurgence last week I said that fiscal consolidation would prove difficult.  Indeed in the Modi Government’s first Budget the fiscal consolidation target of a deficit of 3.0% of GDP has been pushed out a year to 2018 in exchange for higher spending on infrastructure.  In general though the budget has much in it to applaud but there were also a couple of missed opportunities.

Economic growth will get a boost from increased investment in roads, railways and power plants.  In total the capital expenditure budget is projected to be 25% higher in the new fiscal year (FY).  Implementation will be challenging and makes proposed changes to land acquisition rules all the more critical.  The higher spending means the FY16 deficit of 3.9% of GDP will be higher than the previously expected 3.6%, although will still be lower than the estimated 4.1% of GDP in FY15.

One area of disappointment on the spending front was subsidies.  While spending in this area will be lower in FY16 that’s mostly due to lower commodity prices.  Subsidy spending is ripe for a significant structural overhaul and the best time to do that is when growth is strong.

Changes on the revenue side were all positive and include the phasing in of a lower corporate tax rate from 30% to 25% over the next four years and the planned implementation of a Goods and Services Tax from April next year.

There was nothing in the budget on labour market reform.  As I said last week this is a critical area for the Government to make progress if it wants to meet its growth aspirations.  But on balance this is a good budget and supports our argument of an economic resurgence under way in India. 

While we’re on the subject of emerging markets China’s second rate cut announced over the weekend was a clear signal the government  is keen to put a floor under the growth slowdown.  Despite trying to suggest that its monetary stance remains unchanged, two rate cuts and a reduction in the required reserve ratio argues a shift away from PBoC’s previously stated neutral position.  Further rate cuts seem likely.

Monday, March 2, 2015

Data Insight: New Zealand Terms of Trade

Key Points:
  • New Zealand’s terms of trade fell -1.9% in the December quarter, the combined result of a -1.8% decline in export prices and a +0.2% rise in import prices.  The index has now fallen 6.4% from the peak of June 2014.
  • Dairy prices led the decline falling -14.8% over the quarter.  This was offset by healthy price increases in other key commodity exports such as meat (+12.4%), forestry (+8.4%) and aluminium (+7.8%). 
  • Prices rose in a number of import categories (mechanical machinery, transport equipment) over the quarter, largely due to the weaker currency.  However this was almost entirely offset by a decline of 10.0% in petroleum products.
  • Given the decline in dairy prices over the 2014 the terms of trade has remained surprisingly robust, assisted by the strength in prices of other commodity exports and, more recently, the sharp drop in the price of oil.  
  • Since December oil prices have recovered and dairy prices are also higher, although the latter won’t be captured in the terms of trade until the June quarter.  But right now it appears the worst of the decline in the terms of trade is behind us.

Friday, February 27, 2015

Data Insight: US CPI

Key points:
  • US consumer prices fell -0.7% in January, their third consecutive decline.  A further decline in energy prices was the key contributor to the weakness.   This has pushed the annual rate of headline inflation into negative territory with a reading of -0.1%.
  • The more important core inflation measure came in modestly stronger than expected at +0.2% over the month and +1.6% for the year.  Core goods prices remain weak with the annual rate of increase running at -0.8%.  That’s thanks to the stronger dollar and some degree of spillover from lower petrol prices into lower costs of transportation of goods.
  • However core services inflation is looking increasingly sturdy.  That component (which makes up about 60% of the CPI) was up +0.3% over the month and +2.5% over the year.  That’s a sign of an economy that is continuing to strengthen and supports our contention that as output gap closes in the US, inflation will become broader based.
  • Energy prices have stabilised recently and petrol prices have risen over February in the US.  That supports Janet Yellen’s testimony at Congress this week where she said that many of the factors holding inflation down are likely to prove temporary.  So while headline inflation looks set to remain low for a few months yet, that won’t stop the FOMC from beginning the interest rate normalisation process.  But it does mean they can be a bit more patient.