April 9, 2014

Australia & the World on two pages – April 2014

The upward trend in the advanced economy business surveys faltered toward the end of 2013 and this has continued into early 2014. Some of this reflected the disruptive impact of bad weather on supply chains but the March business survey results suggest a levelling out in the pace of growth

Global: The upward trend in the advanced economy business surveys faltered toward the end of 2013 and this has continued into early 2014. Some of this reflected the disruptive impact of bad weather on supply chains but the March business survey results suggest an underlying levelling out in the pace of growth. Although unemployment rates and margins of idle capacity are trending down in the big advanced economies, they remain high by historical standards – allowing central banks to persist with historically low policy rates even as their economies pick up. Conditions remain very mixed in the emerging economies with Chinese growth slowing, Indian economic performance remaining disappointing and subdued activity growth across the rest of emerging East Asia and Latin America. High inflation remains a problem in many of these economies.

  • Advanced economy central banks face divergent economic conditions, but their policy responses appear very similar: prolonged periods of low interest rates. The US Fed has updated its guidance on interest rates to allow for faster than expected progress toward lower unemployment. Instead of setting a 6½% threshold for the jobless rate to fall to before it reviews interest rates, it will assess progress toward “maximum employment”. The upshot is that interest rates look set to stay between zero and 0.25% for “a considerable time” after its asset purchase program ends (which we expect by the end of this year). The Bank of England faces a similar situation and rates look set to stay low for years. The ECB expects its policy rates to stay around or below their current low levels for “an extended period of time” as inflation is running well below its target rate.
  • Although global growth is currently running around its trend rate and the above-trend pace predicted for next year should slightly erode spare capacity, inflation is not posing a problem in the advanced economies. Their jobless rates and idle industrial capacity are trending down but remain high by historical standards. Headline CPI inflation in the big advanced economies is expected to gradually pick-up from last year’s 1.3% to 1.7% in 2014 and 1.9% in 2015 – still meeting most central bank targets for price stability. This should allow advanced economy central banks to maintain low policy interest rates in years to come. Inflation is more of a problem in the big emerging economies. China is an exception with its 2% yoy inflation rate. Central banks in these economies either have lifted rates through the last year or are warning that hikes may be needed to curb inflation.
  • Behind the inevitable monthly volatility in the data (some weather related) and divergence between individual economies, there is a flattening out in the growth rate in the main advanced economies. March industrial business surveys give the most up to date picture showing readings consistent with solid but no longer accelerating growth for the early months of the year. This follows a ramp up in growth through 2013. Headline purchasing manager business survey measures have dipped slightly across the UK, Japan and the Euro-area while the US numbers had turned down even earlier (partly reflecting weather related disruptions).
  • Services account for a much larger share of economic activity, but also show signs that growth has stalled. While the UK and US surveys show good growth, their recent trends have been downwards. The Euro-zone was picking up from weak levels but fell slightly in March and Japan’s service sector expects markedly lower levels of activity in April as the rise in indirect taxes takes effect. The long running Tankan survey also shows growth slowing post-tax hike.
  • The slowing trend in the big emerging economies continued into the early months of 2014. Chinese industrial output, fixed investment and retail trade all showed a slight softening in their still robust growth in the opening months of the year. The export data has been especially weak but it is distorted by a crack-down on false invoicing. All Chinese numbers are distorted by the timing of the Lunar New Year holiday but there is not much sign of brighter conditions across the other emerging economies of East Asia. Similarly, the Indian monthly data on output and foreign trade shows little sign of the upturn that was signalled in some of the business surveys.
  • Behind the forecast acceleration in global growth from 3% in 2013 to 3.5% this year lie quite divergent conditions between advanced and emerging market economies. Growth in the former is expected to rise from 1.3% last year to 2.2% this year. Most of that acceleration has already been delivered as GDP grew by just over 2% yoy in the G7 Advanced economies in late 2013. Growth in the emerging market economies, by contrast, should barely change between 2013 and 2014 – the slowing trend in China offsets a pick-up in growth elsewhere.

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