An economic update from Colonial First State Global Asset Management
1. US
Trump’s inauguration speech sent a clear message that from now it would be ‘America First’ and a call to ‘buy American and hire American’. While financial markets continued to react largely positively to President Trump, his protectionist and anti-immigration rhetoric and policies began to weigh on markets towards month end.
Annual growth for 2016 came in at 1.9% per year, up from 1.7% per year in Q3 2016.
Employment was a little weaker than expected in December, increasing by 156k (from a revised 164k in November). Inflation continued to increase at a moderate pace with headline CPI up 0.3% per month in December and the annual rate increasing to 2.1% per year (from 1.7%).
2. UK
The annual rate of inflation rose to 1.6% per year in December (from 1.2%), with the core CPI up 1.6% per year in November (from 1.4%).
Q4 2016 GDP came in at 0.6% per quarter, keeping the annual rate at 2.2% per year, in-line with the BoE’s revised forecasts and significantly above pre-Brexit expectations.
Prime Minister Theresa May confirmed that the UK will take back control of immigration and will leave the single market but is hopeful that a free trade agreement can be reached with the EU and pledged to give both houses of Parliament a vote on the final deal.
3. Europe
The European Central Bank met on 19 January 2017 and left monetary policy unchanged. The next meeting is scheduled for 9 March 2017. EU growth remained robust in Q4 2016, coming in at +0.5% per quarter, with the annual rate increasing to 1.8% per year, well above estimated potential growth of 1% per year. The EU unemployment rate continues to decline falling to 9.6% in December, from 9.7%, the lowest rate since mid-2009. The first estimate of January Eurozone CPI showed inflation increased to 1.8% per year from 1.1% per year previously.
4. China
China showed a pick-up in growth in Q4 2016, GDP increased to 6.8% per year from 6.7% previously, well within the 6.5%-7% target for 2016. Other economic data over the month showed further stabilisation in the economy. Industrial production decreased to 6.0% per year, retail sales were up slightly to +10.9% per year and fixed asset investment fell 8.1% per year. Inflation remained moderate in December, decreasing to 2.1% per year from 2.3% per year.
5. Australia
The RBA kept interest rates unchanged at 1.5% at their 7 February 2017 meeting. Q4 2016 CPI came in below consensus estimates. Headline CPI rose 0.5% per quarter and 1.5% per year, from 1.3% per year in Q3. Key drivers included increases in tobacco (+7.4% per quarter) and automotive fuel (+6.7% per quarter).
Underlying inflation, the RBA’s preferred measure, rose to 0.4% per quarter, while the annualised rate rose slightly to 1.5% per year still below the RBA’s 2-3% target band, and so are unlikely to lead to any change in policy or outlook.
The December terms of trade data showed an all-time record surplus of $AU3.5bn, significantly above the $AU2bn expected.
The increase was led by a 5% increase in exports, driven largely by increasing prices for coal and iron ore over the month.
The Australian dollar was stronger with commodity prices over the month. The AUD ended the month up 5.02% against the USD at $US0.7570. The AUD continues to be supported by improvements in commodity prices and general expectations that the RBA interest rate cutting cycle is at an end.