I’ve just come back from a few days away in the glorious Hawkes Bay. While catching up with developments of the last few days, there were a few things that caught my attention…
While acknowledging the generally positive
tone of recent US data, especially the labour market, some US June month activity
data was a tad weaker than expected. June
retail sales rose 0.4% in the month versus expectations of 0.8%. Sales were softer still once automotive and
petrol sales were excluded, falling 0.1%.
While the housing market is on an improving trend off a low base, building
permits and housing starts were also weaker than expected in June, falling 7.5%
and 9.9% respectively. The poor housing
stats result was probably weather-related.
The Leading Index was also flat between May and June.
It therefore looks like my 1.2% (saar)
expectation for Q2 GDP data due next week could be a bit “toppy”. I’d already shaved a bit of following weaker
than expected trade data (net exports). It’s
important to remember that June quarter growth should not be seen as a bellwether
for US growth in the period ahead. We
have long expected the second quarter to be the weakest for US growth this year
reflecting the fact that fiscal drag would be at its zenith in the period. While most forward indicators continue to
point to a stronger second half of the year, I’m still not as convinced as some
that the Fed will start tapering in September.
Revisions to historical GDP released at the same time could be critical,
as will payrolls data next Friday.
The July China flash manufacturing PMI was
softer than expected, coming in at 47.7 in July. This suggests further downside risk for GDP
growth this year. Remember this index is
the SME export-dominated index. While we
weren’t expecting to see any recovery in this index until later this year as
America and Europe post stronger growth, the slip in the index this month was
significant. I expect the official PMI
which has broader coverage to continue to hold up better but it seems likely
this index is now destined for a sub-50 print in July. That means risk to my 7.6% China GDP forecast
for 2013 is biased to the downside. The
authorities seem still content to focus on reforms rather than stimulus,
although the announcement of tax breaks for small companies and a speeding up
of infrastructure construction will lend some support to growth.
In brighter news, the Euro zone flash PMI
printed over the 50 benchmark in July, its strongest reading since early 2012. The composite index (manufacturing and
services combined) came in at 50.4, up sharply from 48.7% in June. That supports our view that while we don’t expect
rampant growth anytime soon, economic conditions in the Euro zone are beginning
to stabilise. There might even be an
element of upside risk to my q/q forecast of zero for Q2 GDP. With forward indicators continuing to improve
(German business confidence rose for a third straight month in July) I think we
see modest growth in the second half of the year which would result in annual
growth (q4/q4) of zero for calendar 2013.
UK GDP second quarter growth came in at
0.6% q/q, in line with market expectations.
Annual growth is now 1.4%. It’s
pleasing to see the UK string two consecutive quarters of growth together after
the economy posted a more modest 0.3% expansion in the March quarter,
especially following recent downward revisions to historical GDP growth. This latest result leaves the UK still 3.3%
below its pre-GFC peak but suggests some momentum was starting to build.
I was surprised
to see in the minutes of the July MPC meeting at the Bank of England that
no-one supported an expansion of the Bank’s asset purchase program. That’s surprising on two fronts. Firstly, at the previous meeting 3 people
(including previous Governor Mervyn King) supported an expansion of the
program, although that was voted down by the other members. Secondly, this was Mark Carney’s first
meeting in charge and the perception was that he would be more inclined towards
further monetary accommodation. Perhaps
at this point they believe that given the better tone to the data, the
development of their forward guidance process will be sufficient to achieve
Finally at home the RBNZ’s July OCR review statement
was interpreted as hawkish. The offending
comment was the “…removal of monetary stimulus will likely be needed in the
future…”. That’s certainly the first move towards an explicit tightening bias
as opposed to the implicit bias in its interest rate projections. I’ve kept with an expectation of a first tightening
in December this year while most of the rest of the economic prognosticators
have shifted to March 2014. I think it
will clear by year-end that higher interest rates are warranted and that March
will ultimately prove to be too far out for the Bank’s comfort. If the RBNZ wants to stick to its expectation
not to move rates this year, then the January OCR review is also a possibility
for the first move. Time will tell.