Last month (“Glass half full”) was the most pessimistic that we have been for a while about the global economy, but we are over it now. Last month we indicated that the slowdown may be temporary as central banks paused monetary policy and governments actioned fiscal policy expansion in response to slowing GDP. BREXIT, US/China trade war and tariffs are all factors in the current economic slowdown. It seems however that we can forget about near-term recession fears despite these factors and a temporary inversion of the yield curve.
Many asset classes have done well for the calendar year to date. Equities have recovered from the late 2018 sell off. It has not however been broad based, income securities like property and infrastructure have been in strong demand as have high growth tech companies as bond yields have fallen, mining companies have also done well as iron ore prices spiked with supply disruptions. While a recession may not be imminent, a likely scenario is for GDP growth to muddle along at a slower than previously expected pace. The issue for companies may be how to grow profits in a slower growing economy.
In the US, leading indicators of activity during March presented yet another mixed picture. Consumer confidence lifted while manufacturing leading indicators were mostly softer… but not terrible. Key housing indicators were mixed with a rise in housing permits, housing starts, and existing home sales while new home sales fell, and pending home sales lifted.
The unemployment rate troughed in September at 3.7% yet this has not proved enough to push wages higher, faster, and to cause inflation to lift. The Fed is likely to leave rates on hold given this predicament. Meanwhile, the large tax cuts in the corporate sector have supported strong growth in profits. Earnings are expected to roll off and this month we will find out if brokers have revised their estimates down far enough.
Fading fiscal stimulus, tighter financial conditions, softer global growth are leading economists to lower GDP forecasts not only in the US but globally. Leading indicators are suggesting slower US growth and a small possibility of a recession…if you’re a ‘glass half empty’ type.
In Europe the economic slowdown is the most pronounced. Italy has entered a recession and Germany is close to a recession. Leading economic indicators suggest more weakness ahead although more recent data on industrial production, retail sales, unemployment and wages growth surprised on the upside. BREXIT remains unresolved and a major uncertainty along with some political unrest in other European countries particularly France.
High wage costs in Europe have caused growth in corporate profits to decelerate sharply. The tight labour market and fall in profits could spur inflation however slower GDP growth is a mitigating factor. The ECB is likely to leave rates on hold for the foreseeable future, stabilisation of the global economy is required.
In China GDP growth is heading towards 6% however the authorities are unlikely to allow it to fall below that level. Authorities are boosting fiscal spending with a focus on boosting household spending power through tax costs and monetary policy easing rather than lifting infrastructure spending (not to the exclusion of infrastructure spending).
The trade war with the US is hurting the Chinese economy evidenced by the February trade data that showed a deterioration in exports. The trade talks between the US and China appear to be progressing well with most commentators expecting a deal, I personally am yet to be convinced given Trumps’ erratic and unconventional political behaviour not to mention his re-election ambitions.
The risks from the trade war remain high and already have flow on effects for the Australian economy with delays to various commodity imports and anti-dumping investigations. Other issues include; high debt, rising bond defaults, and rising non-performing loans undermining bank stability, and potentially a re-start of capital flight if the government liberalises its capital account.
In Australia final quarter GDP growth disappointed. Falling spending on housing and weak growth in household consumption were contributing factors. The weakest part of the economy has been home building as housing prices collapsed. Instead of remaining weak, housing activity has started to show signs of bottoming. Weekend auction clearance rates have picked up and today, credit growth for homes lifted with a strong uplift for first home buyers.
Other positives for the economy have been the growth in value of exports and record high trade surpluses. No doubt the current run of commodity price rises has helped this scenario. High iron ore and coal prices look likely to persist longer than expected. Labour market conditions remain strong with the unemployment rate continuing to grind lower and Government spending increasing. Adding to this will be the additional spending and tax cuts from either a Liberal or Labor party victory in the soon to be announced federal election. This is expected to provide a fiscal budget bounce for the Australian economy.
The risk for Australia is that continued weakness in the housing sector extends to general household spending. This could be cause for a recession. No doubt that interest rates will remain on hold for the time-being.
On balance while there has been a rather negative end to 2018 and a lowering of GDP forecasts there remains a slow build-up of inflationary pressures. There are some early signs suggesting the slowdown in global economic activity is bottoming?out. The global manufacturing PMI printed at 50.6pts in March, same as in February. China’s official and unofficial Caixin manufacturing PMIs rose back in March above the 50 pts threshold consistent with expansion. And the ZEW economic sentiment index for the G4 countries picked?up in March.
Unemployment in most developed
economies continues to fall, wages are rising and with mounting pressure in
certain industries, inflation remains low but could breakout anytime soon.
BREXIT and the US / China trade war and uncertainty surrounding any potential
trade deal, and tariffs are dragging on many economies. A resolution in any one
of these scenarios could see a lift in GDP and inflation while a resolution to
BREXIT and US / China trade could see a more pronounced lift in trade and GDP.
|Tax||– Immediate tax cuts for low-to-middle income earners|
– Extension of personal income tax cuts
– Increasing the Medicare Levy low-income threshold
|– Excess imputation credits to be non-refundable|
– Limiting negative gearing to new housing investments
– Halving the 50% CGT discount
– 30% minimum tax rate on discretionary trust distributions
– $3,000 maximum deduction for cost of managing tax affairs
|Superannuation||– No work test for voluntary contributions up to age 66|
– Bring forward rule extended to people up to age 66
– Spouse contributions extended to people aged up to 74
|– Reducing the non-concessional contributions cap to $75,000|
– Abolishing the concessional contributions cap carry forward
– Re-establishing 10% test for personal tax-deductible contributions
– Reducing the Div 293 tax income threshold to $200,000
– Increasing the SG rate to 12% and set out a pathway to 15%
– Prospective reintroducing a ban on LRBAs
|Social security, health and aged care||– One-off energy assistance payment for social security pension payments|
– Increased access to diagnostic imaging and higher Medicare rebates
– Funding for 10,000 extra home care packages and 13,500 residential care places
– Extension of Commonwealth Home Support Program
|– More details to come.|
|Other||– New $3.9b emergency response fund to held agribusiness recover from natural disaster|
– Education and skills package
– Health and aged care package
– $2b for Government climate solutions
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Sources: Alexander Funds Management (Steven Roberts); Commbank Global Markets Research, RBA, Morningstar.