An economic update from Colonial First State Global Asset Management.
What have been the major economic events of the past few months?
1. The US
Economic growth in Q2 16 was driven by improvements in consumer spending (+4.2%), while weak business investment (−2.2%) and government spending (−0.9%) were the laggards. Employment was stronger in June, increasing by 287,000 from 38,000 in May (+180,000 was expected). The unemployment rate increased by 0.2% to 4.9% over Q2 16, but remains well below the 10% peak seen in the GFC. Inflation remains subdued. Headline Consumer Price Index (CPI) was running at 1.0% per year to June, whilst the core CPI increased 0.1% to 2.3% per year. The Federal Reserve’s favoured measure of underlying inflation, the core PCE, was steady at 1.6%/yr to June.
2. The UK
The Bank of England (BoE) met on 14 July 2016 and unexpectedly left policy unchanged. The market had been expecting a significant easing package from the BoE to combat the expected post-Brexit economic weakness after Governor Mark Carney’s comments that more stimulus was “likely to be required” in the summer months. The decision to remain on-hold was, however, driven by a desire to wait for the August inflation report and the opportunity to re-state the forecasts for growth and inflation as well as wait for further activity date post-Brexit. Over the month, confidence surveys for business and consumers showed mixed results. Business confidence as measured by the Lloyds Bank Business Barometer rose to 29 from the post-vote low of 6, almost recovering to May’s level of 32. Consumer confidence, however, fell more than expected to −12 from the post-Brexit reading of −9, compared to −1 before the vote.
3. Europe
The European Central Bank met on 21 July 2016 and, as expected, no policy changes were announced. The statement acknowledged Brexit, but noted that financial markets were seen to have weathered the news with “encouraging resilience”, leaving financial conditions “highly supportive” of the economic recovery and the projected inflation pickup. The first estimate of July CPI for the euro area was recorded at +0.2%/yr, an increase from +0.1% per year in June.
4. Japan
The Bank of Japan’s (BoJ) policy board met on 29 July 2016 and as expected eased monetary policy, but by the barest of measures, disappointing markets. The BoJ announced it would conduct a “comprehensive assessment” of the economy and its policy regime at the September meeting, suggesting the possibility of further easing or a change to monetary policy. Headline CPI remained low at −0.4% over June, while the core measure excluding food and energy fell to 0.4% from 0.6% per year in May, both well below the BoJ’s 2% target.
5. Australia
In its 2 August 2016 meeting, the RBA cut the cash rate by 25 basis points to 1.50%. In the statement they noted that “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy.” Q2 2016 CPI data was released and was in line with consensus. The Headline CPI rose by 0.4% per quarter in Q2 16, but this took the annual rate down to 1.0% from 1.3% per year in Q1 16. The Australian dollar strengthened against the major currencies in July. The AUD finished up 2.0% against the USD to $US0.7596. This was despite the soft Q2 16 CPI print and the expectation of further easing from the RBA in August.