I’ve been a bit of a lazy blogger this week so this is a bit of an “omnibus” post on the key events of the week (at least according to me!) - the PrEFU in New Zealand, the latest flash PMI results from around the world and the release of the minutes from the July FOMC meeting.
Starting at home the Pre-Election Economic and
Fiscal Update (PrEFU) contained little in the way of surprises. The Treasury has knocked a bit off their
near-term growth estimates reflecting weaker dairy prices, offset to some extent
by stronger net migration. This has
brought their forecasts closer to ours.
Like us they believe the New Zealand economy is past the peak in
quarterly growth rates although our numbers are still a tad softer than theirs
– but we’re talking about a difference of 0.1% per quarter on average.
The lower growth numbers has had a small
impact on the key fiscal indicators over the forecast horizon but the
underlying trend improvement in the operating balance and debt ratios remains
unchanged. The Treasury is still
expecting the return to fiscal surplus to be achieved in 2014/15.
Importantly from the perspective of the
Reserve Bank, fiscal policy remains contractionary over the forecast period
with an average fiscal impulse of -0.4% per annum, unchanged from the Budget.
The Government continues to keep its fiscal
powder dry – there was no news in the PrEFU on how they intend to use their new
initiative allocation. That means they
go into the business end of election campaign with their fiscal options
open. That said the National Party
campaign launch is this weekend so we may see some policy shots fired there.
Further afield we saw the latest round of
flash manufacturing PMI’s from Markit this week and they were a bit of a mixed
bag. The good news was the surge higher
in the US index to 58.0 in August from 55.8 in July. That’s its highest reading since early 2010
and supports our expectations of stronger US growth in the second half of the
year on the back of further gains in employment underpinning solid consumption
The Japan index also rose over the month from
50.5 to 52.4 supporting the view that growth will resume in the third quarter
after the bigger-than-expected contraction in the second quarter. But with a return to trend growth in Q4, that
still only delivers annual average growth of around 1.0% this year.
The China and Euro zone indices were
disappointing. The slip in the China
index from 51.7 to 50.3 along with the recent softness in the some of the July
activity data has effectively removed the bias towards upside risk to growth in
the second half of the year. We think
GDP growth tracks around 7.4-7.5% for the rest of the year, supported by likely
further tweaks to fiscal and monetary policy settings.
The Euro zone remains the problem child in
the global economy. Disappointing Q2 GDP
growth is being followed with weakness in Q3 activity data. The manufacturing PMI fell from 51.8 to 50.8
over the month, a 13-month low. While we
expect reduced fiscal drag, easier monetary conditions and a weaker Euro are
collectively expected to keep the Euro zone from slipping back into recession,
it’s no surprise the secular stagnation stories are starting to reappear. More on the Euro zone next week.
Finally this week the minutes from the July
FOMC meeting were interesting on a couple of fronts. A discussion around the slack in the labour
market revealed that the majority of meeting participants thought the recent
improvement in the labour market had been faster than expected and that
“conditions had moved noticeably closer to those viewed as normal in the longer
At the same time Staff forecasts showed a
downward revision in their estimate of potential GDP, the natural conclusion
from which is the output gap is now smaller than it was before and that all
else being equal the Committee is getting closer to tightening monetary
policy. There was also a discussion at
the meeting on the stimulus exit strategy.
Those discussions were entirely appropriate for this stage of the cycle
and there was nothing in any of this to change my view that QE will be finished
in October but no rate hikes to mid next year.
Janet Yellen’s upcoming speech at the annual monetary symposium in Jackson
Hole might add further colour...but then again it might not. Mario Draghi is also speaking so watch out