This week, the International Monetary Fund (IMF) lowered their forecast for global economic growth in 2019 from 3.7% to 3.5% and from 3.7% to 3.6% in 2020, citing factors from US-China trade tensions, tighter financial conditions, and political uncertainty. There were few signals as to how and for how long these uncertainties might play out during this week's World Economic Forum in Davos, with President's Trump, Xi and Macron and UK Prime Minister Theresa May notable absentees all facing more immediate concerns back at home.
The slowing in the IMF's global growth outlook mostly referenced deteriorating conditions in the euro area. Germany, the largest economy in the region, has been impacted by a weakening in production, particularly from its blue-chip auto sector in response to recent emissions targets for new cars set by the European Union, and by trade uncertainties. Italy's economy is also weighing on the outlook due to political uncertainty and from the financial risks posed by its heavy level of national debt.
Remaining with Europe, the latest policy meeting of the European Central Bank (ECB) held during the week described the risks to the outlook as having "moved to the downside" compared to the assessment from December of "broadly balanced" but "moving to the downside"; a subtle but clear shift in the assessment of the growth outlook. ECB President Mario Draghi was clear that the Governing Council did not discuss policy options at this meeting and will be attempting to gain further clarity over its assessment of the outlook ahead of the March meeting where it will publish its updated forecasts. For now, the Governing Council's underlying assessment is that despite a near-term expectation for a weakening, the growth outlook is underpinned by favourable financial conditions, a strengthening labour market leading to stronger wages growth and an ongoing but somewhat slower expansion in the global economy.
Developments in China were also of significance this week. Growth in China's economy slowed from 6.5% to 6.4% over the year to the December quarter, its slowest expansion since the global financial crisis around a decade ago, while growth over the calendar year was 6.6%. Chinese officials had targeted growth of 6.5% in 2018. The mild deceleration in growth comes amidst headwinds from trade tensions, a softer global economy and also the impact of longer-term structural reforms, which aim to set growth on a more sustainable path by addressing factors such as financial stability risks and reducing excess industrial capacity to improve production quality and environmental outcomes. Policy measures to help support growth include reductions to banks' reserve requirements to boost liquidity, tax cuts and infrastructure investment.
The data flow was restricted in the US again this week, however; US President Trump as of Saturday morning announced a temporary deal had been reached to reopen the government for 3 weeks without securing border wall funding from the Democrats. The agreement comes after a 35-day partial shutdown of US government agencies.
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Signs of a slowing growth outlook were also evident in Australia this week. Westpac-Melbourne Institute's Leading Index fell to a reading of -0.27% in December from +0.42%, which provides an indication for growth in the domestic economy to slow below its potential pace of around 2.75%Y/Y over the next three to nine months. In Q3, output growth slowed from 3.1% in annual terms to an around-trend pace of 2.8%.
The Leading Index reflects changes in a range of economic and financial market data points, with the deterioration in December pointing to headwinds for the domestic economy, which according to Westpac's Chief Economist Bill Evans include; a negative wealth impact on households' balance sheets from declining property prices, slowing residential construction activity and lower employment growth and investment from the business sector due to political uncertainty and heightened volatility in markets.
The Reserve Bank of Australia (RBA) next meets on February 5, which will be keenly anticipated given that much has changed globally since the Board last met in December. Over the summer, communication from other major central banks — including in the US, Europe, UK and Japan — has acknowledged rising uncertainties in the global economy and the potential headwinds to the growth outlook.
According to the RBA's most recent forecasts, growth in the domestic economy is anticipated to increase at an above-trend pace of 3.5% in 2018 and by 3.25% in 2019, while its guidance is that "... the next move in the cash rate was more likely to be an increase than a decrease, but that there was no strong case for a near-term adjustment in monetary policy". Financial markets have continued to price out expectations for a rate increase over the next 18 months and will be looking to the Governor's statement at the February meeting for signs of a shift from the Board in their assessment of conditions both at home and abroad.
Against a softening outlook, the key data event of the week showed ongoing strength in Australia's labour market. For the third consecutive month, employment posted a stronger-than-forecast result with a 21,600 increase in December, while the nation's unemployment rate lowered from 5.1% to 5.0% (see our full analysis here).
In 2018, Australia's labour market performed stronger than anticipated as employment increased by 268,600. As highlighted by our chart of the week, the momentum was maintained towards the back end of the year, with employment increasing by 87,300 over Q4, which was an outperformance of 29,300 relative to market expectations.
Chart of the week
The Leading Index reflects changes in a range of economic and financial market data points, with the deterioration in December pointing to headwinds for the domestic economy, which according to Westpac's Chief Economist Bill Evans include; a negative wealth impact on households' balance sheets from declining property prices, slowing residential construction activity and lower employment growth and investment from the business sector due to political uncertainty and heightened volatility in markets.
The Reserve Bank of Australia (RBA) next meets on February 5, which will be keenly anticipated given that much has changed globally since the Board last met in December. Over the summer, communication from other major central banks — including in the US, Europe, UK and Japan — has acknowledged rising uncertainties in the global economy and the potential headwinds to the growth outlook.
According to the RBA's most recent forecasts, growth in the domestic economy is anticipated to increase at an above-trend pace of 3.5% in 2018 and by 3.25% in 2019, while its guidance is that "... the next move in the cash rate was more likely to be an increase than a decrease, but that there was no strong case for a near-term adjustment in monetary policy". Financial markets have continued to price out expectations for a rate increase over the next 18 months and will be looking to the Governor's statement at the February meeting for signs of a shift from the Board in their assessment of conditions both at home and abroad.
Against a softening outlook, the key data event of the week showed ongoing strength in Australia's labour market. For the third consecutive month, employment posted a stronger-than-forecast result with a 21,600 increase in December, while the nation's unemployment rate lowered from 5.1% to 5.0% (see our full analysis here).
In 2018, Australia's labour market performed stronger than anticipated as employment increased by 268,600. As highlighted by our chart of the week, the momentum was maintained towards the back end of the year, with employment increasing by 87,300 over Q4, which was an outperformance of 29,300 relative to market expectations.
Chart of the week
Over the near term, the outlook for the labour market is supportive given that employment growth is tracking at a robust 2.1% annual pace and ahead of growth in the working-age population (around 1.7%Y/Y). However, factors that could slow the pace of employment growth and place upward pressure on the nation's unemployment rate over 2019 are a likely downturn in residential construction activity and increasing uncertainty from the upcoming federal election and from global developments.
