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
The US Federal Open Market Committee of the US Federal Reserve Board (the Fed) met on 28-29 April 2015 and made no change to policy. Importantly, the Fed acknowledged the economic slowdown in the winter months “in part reflecting transitory factors”. This is evident in the slowdown in job creation, a decline in household spending, softer business fixed investment, declining exports and the slower recovery in the housing market.
On the positive side, consumer sentiment remained high and households’ real income rose due to lower energy prices. The Committee expects inflation to remain near its recent low, but gradually rise toward 2% over the medium term as the labour market improves further and the transitory effects of declines in energy and import prices dissipate. At this stage, the first interest rate hike since 2006 is expected in September 2015.
Employment gains have been more muted in recent months, driven by bad weather, however, the unemployment rate has still fallen and is 5.4% at the end of April 2015.
2. United Kingdom and Europe
The Bank of England again left policy unchanged at its 9 April 2015 meeting. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375 billion.
The advance estimate of quarter one 2015 GDP was released and came in below expectations at 0.3% per quarter. The weakness was broad based, with falls in construction and industrial production. Inflation is weak, remaining flat for the year to March, after rising 0.2% per month. The unemployment rate fell to 5.6% from 5.7%, in the latest release available for the three months to February 2015. The Conservative Government led by David Cameron was also re-elected in what was a surprise, given pre-election opinion polls.
In Europe, the Consumer Price Index (CPI) was estimated to be flat for the month of April, and 0.6% per year, which was steady on March 2015. The unemployment rate across the Eurozone remains at 11.3% for the month of March, steady for the last three months, but still well below its March 2013 peak of 12.1%.
3. Japan and China
In Japan, the Bank of Japan’s policy board convened on 21 January 2015 and left its qualitative and quantitative easing program at an annual increase of ¥80 trillion to its monetary base.
Meanwhile in China, quarter four 2014 GDP data showed a growth of 1.5% in the three months to 31 December 2014 and 7.3% over the 12 months to December 2014 and continues to indicate a controlled slowdown of growth. The ongoing property downturn is being offset by an improvement in the services sector, particularly financial services.
4. Australia
The Reserve Bank of Australia left the official cash rate on hold at 2.25% on 7 April 2015, however, they cut interest rates to a record low of 2% on 5 May, driven by a weaker growth and inflation outlook.
The headline CPI rose by 0.2% in the first quarter of 2015. This took the annual pace of headline inflation down to just 1.3% per year from 1.7% per year at the end of 2014.
The Australian dollar (AUD) was mixed in April 2015. In contrast to recent falls, the AUD appreciated 3.9% against the USD, ending the month at $US0.7906 - its highest level since mid-January 2015. The AUD also rose against the New Zealand dollar, the Japanese yen and the British sterling, but fell against the Euro.