An economic update from Colonial First State Global Asset Management.
What have been the major economic events of the past few months?
1. United States
News out of the United States in October was dominated by negotiations over a new funding deal for the government and the debt ceiling and the Federal Reserve leaving interest rates on hold. The final deal included the suspension of the $US18.1 trillion debt ceiling until 15 March 2017 and government funding for two years.
The first estimate of Q3 2015 GDP was 1.5% on a seasonally adjusted-annualised-rate, down from the 3.9% rate recorded in Q2 2015. Much of the lower growth rate was driven by reduced inventory levels, with companies taking advantage of business and consumer spending to unwind high inventory levels.
On the inflation side there remains limited signs of a trend up. The Federal Reserve’s preferred measure, the Core Personal Consumption Expenditure Index rose 0.1% per month and 1.3% per year in September. Headline inflation fell -0.2% per month to be flat for the year and ex food and energy rose to 1.9% per year from 1.8% per year where it has been for the last six months.
2. United Kingdom and Europe
The European Central Bank (ECB) met on 22 October 2015 and made no changes to policy. The main refinancing rate remained at 0.05% and a target of €60bn of securities are to be purchased each month.
The ECB noted that “…while Euro area domestic demand remains resilient, concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation.” Inflation remains low, with the CPI estimate for October at 0.0% per year, with core inflation at 1.0% per year. The Eurozone unemployment rate fell to 10.8% for September, down from 10.9% and the lowest since January 2012.
In the UK, the Bank of England (BoE) left policy unchanged when it announced its decision on 8 October 2015, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375bn.
The advance estimate of Q3 2015 GDP data was released with growth of 0.5% per quarter and 2.3% per year, down from 2.4% per year in Q2 2015. This was slightly below expectations and was driven by a 2.2% fall in construction spending and a 0.3% contraction in manufacturing production. Overall the UK economy has expanded 6.4% above its pre-recession peak.
3. Japan
The Bank of Japan’s (BoJ) policy board convened on 30 October 2015 and left its Qualitative and Quantitative Easing (QQE) program at an annual increase of ¥80trillion to its monetary base in an 8 to 1 vote, contrary to some expectations.
The BoJ revised down its current inflation forecasts and real growth rate into FY2016 in the semi-annual outlook report released after the meeting. The BoJ now expects inflation to be 1.4% for FY2016 (down 0.5% pts) with inflation not hitting the target of 2% to around Q4 2016 or Q1 2017.
4. Australia
The Reserve Bank of Australia (RBA) left the official cash rate on hold at 2% at its meeting on 6 October 2015 and again on 3 November 2015 – where it has remained since May this year.
In announcing the November policy decision the RBA delivered a balanced assessment of the influences on monetary policy – with economic growth prospects having improved, but inflation now expected to be lower than previously forecast.
The unemployment rate held steady at 6.2% in September, with 5,100 jobs lost in the month. Over the past 12 months 230,000jobs have been added and the unemployment rate peaked at 6.4% in July 2015.
Consumer confidence has risen two months in a row, post the change in Prime Minister. The Westpac Consumer Confidence Index rose 4.2% in October and 4.2% in November to the highest level since May 2015.
The Australian dollar was mixed against the major cross currencies over the month. The AUD finished up 1.7% against the USD in October to $US0.7139.