An economic update from the Economic and Market Research team at Colonial First State Global Asset Management.
The big three
What have been the major economic events of the past few months?
1. United States (US)
The US Federal Reserve (the Fed) announced a further $US10 billion ‘tapering’ in its Quantitative Easing (QE3) bond purchase program at its 29 to 30 July 2014 meeting. This takes monthly purchases down to just $US25 billion and is set to end in October.
The Fed also noted that “growth in economic activity rebounded in the second quarter” and that “labour market conditions improved, with the unemployment rate declining further”. In addition, “household spending appears to be rising moderately and business fixed investment is advancing”.
Growth in the US rebounded in quarter two 2014, up 4%, compared to -2.1% in quarter one. Employment gains remain strong, with the unemployment rate falling to 6.2% in July with 736,000 jobs added over the past three months.
2. United Kingdom (UK) and Europe
In the UK, the Bank of England (BoE) left policy unchanged at its 10 July 2014 meeting. The expectation remains that the first interest rate hike could be as early as late 2014.
The advance estimate of quarter two 2014 Gross Domestic Product (GDP) was released, rising 0.8% per quarter, taking the annual rate to 3.1%, the fastest annual pace since quarter four 2007. This result pushed total output above its previous peak recorded prior to the Global Financial Crisis in quarter one 2008. The result was driven by growth in the services sector, particularly finance, hotels and restaurants.
Inflation data for Europe in June continued to show minimal pricing pressures. Consumer Price Index (CPI) rose 0.1% in June with the annual rate just 0.5%. Greece (-1.5%/yr) and Portugal (-0.2%/yr) are already in deflation while Spain (flat), Italy (+0.2%/yr) and France (+0.6%/yr) are close.
3. Asia
In Japan, retail sales continue to recover post the national sales tax hike (which was introduced in April 2014), rising 0.4% in June, although it still remains 0.6% lower over 12 months.
Meanwhile in China, GDP data showed 2% growth over the quarter, compared to 1.5% in quarter one 2014. Despite this expansion, there are continued signs the property market is cooling. Prices rose in only eight cities in June, versus 15 cities in May. Prices fell in 55 cities in June compared to 35 in May and only eight cities in April.
Australia
The Reserve Bank of Australia (RBA) held the cash rate steady at 2.5% at its 5 August 2014 meeting. There was no change to the RBA’s neutral policy ‘guidance’ and signal that there is likely to be “a period of stability in interest rates”.
The Australian dollar (AUD) fell by 1.5% in July to finish the month at $US0.9296. Falls came later in the month on stronger US economic data and growing expectations that the Fed was getting closer to normalising monetary policy.
On the sharemarket front, Australian equities made an extremely strong start to the FY15, with the S&P/ASX 200 Accumulation Index adding 4.4% in July. This pushed the Index to its highest level in more than six years.