A slowing economy remained a theme over March, while recession risks spooked markets following the inversion of the US treasury yield curve. China delivered on new economic reforms, as the ECB announced renewed liquidity provisions.
The Reserve Bank left the cash rate unchanged, as was widely expected, reiterating uncertainty around domestic household consumption, weak income growth and falling house prices. This backdrop contributed to a GDP rise of 0.2% in the December quarter following another weak increase of 0.3% in the September quarter.
The economic puzzle remains where slower growth is being met with resilient labour markets – a phenomenon occurring globally. Of some comfort, March inflation rose 0.4% to 2.1%, from 1.7% in February. The unemployment rate fell to the lowest level in 7 ½ years (4.9%) in February, while jobs grew a softer 4.6k in the month.
The housing downturn extends with dwelling prices across the capital cities falling 0.7% in March. While February saw a rebound in credit extended to owner-occupiers, housing finance approvals excluding refinancing edging 0.8%, overall the number of loans remains low and continues to indicate that housing demand remains weak.
Consumer confidence deteriorated in March into pessimistic territory at a reading of 98.8, weighed on by both disappointing GDP results and the housing market’s downward momentum. The NAB business survey in March revealed a similar situation with business confidence falling by another 2 points to 0 index points. On the other hand, business conditions improved, lifting to 7 points from 4 in February.
The current account deficit narrowed by $3.6bn to $7.2bn in the December quarter, driven by a trade surplus expansion to $8.4bn. Manufacturing is benefitting from the public infrastructure boom and relative low AUD is boosting international competitiveness.
As the US and China continue to make progress on trade negotiations, the markets tuned into the Fed’s address on monetary policy outlook. While the Fed maintains its confidence in US fundamentals supporting economic expansion, risks from abroad were sufficient to cement the case for a patient approach to better assess their impacts on the US economy, indicating the possibility of there being no more rate hikes to come in 2019.
A downward revision of GDP growth was underscored by a weaker outlook in unemployment and inflation. Economic growth is suggested to be a lower 2.1% in 2019 but remains robust and in line with the long-term trend rate of growth. Inflation continues to remain muted with headline CPI inflation lifting only 0.2% in February, bringing the annual pace to 1.5%, the slowest since September 2016.
The labour market remains healthy with the unemployment rate falling to 3.8%, from 4.0% in the month prior. Consumer sentiment was also of a positive note, lifting to 97.8 in March, following a decline to 93.8 in February.
The US Markit manufacturing PMI declined to 0.5 to 52.5 in March, giving the lowest reading since June 2017, underscored by a slowing in output. Similarly, the US Markit services PMI fell to 54.8 in March from 56.0 in February. Nonetheless, both readings being above 50 are indicative of expansionary activity.
Pleasingly, the US trade deficit narrowed from $59.9bn in December to $51.1bn in January, constituting a 0.9% increase in exports, and a 2.6% drop in imports. The US housing market improved, with home prices rising at a moderated pace in January of 0.1% following a rise by 0.2% in December.
The Annual National People’s Congress (NPC) in China delivered new economic reforms that would see targeted reduction in tax burdens, tax cuts, and reduced pension contribution requirements, which in aggregate, equates to approximately 2% of the nation’s GDP. This comes as the Chinese government has cut China’s GDP growth target to 6.0-6.5%.
Of relief was a lift in manufacturing activity as measured by the Caixin manufacturing PMI, rising from 49.9 in February to 50.8 in March, signalling the first levels of expansion in four months driven by strengthening of new orders and output. The Caixin Services PMI also lifted in March rising to 54.4 from 51.1, and is likewise reflective of expansionary activity.
The jobless rate in China rose to 5.3% in February, an increase from 4.9% in January. New home prices rose by 0.53% in February also, up by 11.1% on a year ago.
The manufacturing story in Japan played to another tone, as the Tankan large manufacturers index fell to 12 in Q1 from 19 in Q4 last year, making the change the largest decline in six years. The Nikkei manufacturing PMI was unchanged at 48.9, indicating manufacturing activity continued to contract in March.
Japanese GDP growth was confirmed at 0.5% in Q4 supported by strong business spending. The trade balance has moved into surplus territory of JPY339bn in February from a deficit of JPY1415.6bn in January, driven by a sharp 6.7% decline in imports, with exports also declining 1.2% in February.
Inflationary pressures remained absent, with Japanese CPI rising a soft 0.2% in the year to February, and unemployment fell to 2.3% in February from 2.5% in the month earlier. The BoJ left rates unchanged with intentions to keep rates at these low levels. While it has faith in Japan’s ability to expand moderately, it forecasts weakness in exports due to downside risks of global demand.
Following weak economic data in the region, the ECB downgraded growth and inflation forecasts while announcing renewed liquidity provisions via Targeted Longer Term Refinancing Operations (LTROs), putting plans to end its quantitative easing stimulus program on hold. Further plans to tighten monetary policy by means of a rate hike have now been pushed out until 2020 at the earliest.
The Eurozone Markit manufacturing PMI fell deeper into contractionary territory at 47.6 in March from 49.3 in February. The situation was similar in Germany, as manufacturing slumped to 44.7 in the same period. The ZEW measure of investor expectations for Eurozone improved with a rise to -2.5 in March from -16.6 in February, which provided some comfort in the leading indicator of economic expectations. German factory orders dropped by 4.2% month-over-month for February, missing market expectations by 0.3%.
On Brexit, the UK did not leave the EU on the 29th of March as per the initial deadline. Instead, the state of affairs has plunged into a territory of greater uncertainty following the failure to secure a majority vote on any one of the shortlisted Brexit options brought into Parliament. The EU leaders are to meet on April 10 to discuss the UK’s departure as the legal default now is that April 12 is the new deadlines on which the UK may still see a no deal exit.
In other UK data, the labour market remained robust with a strong lift in employment and a fall in the unemployment rate to 3.9% in the three months to January. The annual rate of headline inflation edged up from 1.8% in January to 1.9% in February. The Markit manufacturing PMI returned a 55.1 in March up from 52.0 in February, with companies stepping up to build inventories ahead of Brexit.
A more detailed summary is also available.
Information current as at 10 April 2019.
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