Australia & the World on two pages – August 2014

Weak retail trade and net exports point to soft GDP growth in Q2. Headwinds remain, but business conditions jumped to four year high, while, business confidence, orders and capacity utilisation all looking better. We have trimmed our global forecasts.

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We have trimmed our global forecasts to take account of the impact of default in Argentina on Latin American growth and unexpectedly soft Japanese exports and post-tax consumption which led us to significantly lower our Japanese forecast. Elsewhere, solid growth numbers are coming from the UK and US but the Euro-zone presents downside risks (with soft recent business surveys and Q2 GDP in Italy and Belgium) to growth and a clear threat of deflation. The emerging economies now drive around 70% of global output growth but present a mixed picture. China’s growth remains robust, India’s has disappointed but could be about to pick up and East Asian economies are likely to remain subdued pending faster world trade. Overall, world growth in 2015 to rise to 3.6% (nearer trend) from a mixed and disappointing 3.1% in 2014.

  • After a long period in which the focus of most central banks in the big advanced economies has been on low interest rates and injecting liquidity to stave off deflation, boost growth and repair the consequences of the GFC, we are now entering a period of greater diversity in monetary policy. The Fed is still winding back its asset purchases at a rate that should see them end this year but it is still signalling low interest rates into 2015. The Bank of England recently surprised the markets saying that rate rises could come sooner than generally expected. By contrast, the ECB and the Bank of Japan are focussed on ending or avoiding deflation with the former loosening policy and the latter continuing its ultra-easy policy as inflation finally starts to rise.
  • The pace of growth in global industrial output has been steadily slowing since the start of the year. World trade has been surprisingly weak, even in this environment of sluggish world demand, falling in the March quarter and growing only modestly through the following two months. However, service industries make up by far the largest part of global output and data limitations make them much harder to track. Business surveys show ongoing growth in services across the US, UK and Euro-zone, Japanese firms struggling through the post-tax rise slump in demand and disappointingly soft readings in China and India.
  • The divergence in economic conditions between the big advanced economies seems to be widening again. The US economy recovered strongly in June quarter from its early 2014 weather-related weakness, and the partial data and business surveys point to a solid moderately paced upturn – keeping the Fed comfortable enough with the outlook to progress cautiously toward ending its very loose monetary policy. The situation is quite different in the Euro-zone and Japan. Although they still point to growth, Euro-zone business surveys have been softening and the slowdown is broad-based. Industry surveys in big economies like France and Germany, as well as bell-wethers like Belgium, began turning down recently and there are signs in some economies of less buoyancy in their services sector too. The Japanese economy is expected to contract significantly in June quarter (more than offsetting Q1 increases) as demand falls in the wake of the April 1st hike in consumption taxes. Japanese exports are also soft, despite solid growth in its important Chinese export market. We have accordingly lowered our 2014 growth forecast (by 0.3% to 1.3%) to take account of that.
  • The slowing trend in the big emerging economies has continued with 3-month annualised industrial growth slipping from over 5% in late 2013 to around 3½% in May. Export volumes from these economies actually fell in early 2014, remained weak in April, but then rose in May. Monthly partial data on economic activity shows a clear variation between regions. Chinese growth remained solid in June with good growth in industrial output, while YTD investment and retail sales volume growth are up by double digits. Growth finally picked up in India in early 2014 and third quarter surveys of industry look brighter. Growth remains modest in the other emerging economies of East Asia and should stay like that until world trade accelerates. Latin American growth has faded as Argentina moves into recession and we have lowered our forecasts now it has defaulted.
  • Forward looking questions in business surveys vary across the big advanced economies, but generally point to ongoing moderate growth. The most disappointing results come from the Euro-zone, while Japanese firms think they can weather the recent weak period. The most buoyant results come from the US and UK. We expect global growth to quicken from 3.1% in 2014 (revised down from 3.2%) to 3.6% in 2015 (revised down from 3.7%), which is around the long-run trend. The emerging market economies should still account for the bulk of global output growth, but the contribution from advanced economies will rise. Emerging market growth should return to over 5% in 2015 as India’s growth finally picks up.

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