April's downgrade to global growth was heavily weighed by a weakening in the outlook in Europe, with the forecast for 2019 lowered by 0.3ppt to a 1.3% pace. This was driven by broad-based downgrades in the major euro area economies, as shown in our chart of the week, below. These revisions reflect some highly country-specific factors including; new emissions standards impacting car production in Germany, political and fiscal uncertainty in Italy, and anti-government protests in France disrupting consumer spending. Uncertainty related to Brexit is also likely to be spilling over into Europe and weighing on businesses' investment decisions.
Chart of the week
In Europe, the key focus was on the European Central Bank's latest policy meeting. Few changes were expected given that the Governing Council announced an ultra-dovish pivot to its policy stance at the previous meeting a little over a month ago. This included a new round of targeted longer-term refinancing operations (TLTRO-III), which provides the banking sector with access to funding on more favourable terms than in financial markets, though the specific details have not yet been announced. ECB President Mario Draghi said these will be revealed "at one of our forthcoming meetings", of which there are two (in June and July) before TLTRO-III is due to start in September. Economic conditions over the next few months will be key in determining what shape TLTRO-III will take, with most interest around the "built-in incentives", which in the previous iteration offered a discount in pricing relative to the ECB's main interest rate. Regarding recent discussion around tiering the deposit rate changed on banks' excess reserves, the ECB appears to remain hesitant with President Draghi conveying that more analysis was required before any conclusion can be reached.
Also this week, the EU27 granted a second extension under Article 50 for the Brexit withdrawal date, this time until October 31, 2019. A condition is that the UK will now have to hold European Parliamentary elections, unless it can reach a withdrawal agreement by the 23-26 May, with failure to do so resulting in a hard exit on June 1, 2019. For now, all options remain on the table for the UK from approval of the existing deal, a different exit strategy (such as a customs union) or revoking Article 50.
—
Locally, Westpac Melbourne Institute's Index of Consumer Sentiment posted a 1.9% month-to-month rise to 100.7 in April, driven a boost from the 2019/20 Budget. Westpac's analysis showed that responses post-Budget were 7.7% stronger than those taken pre-Budget. A key aspect of the Budget was tax relief for low and middle-income earners and the detail indicated that this had been viewed positively. Around 15% of respondents anticipated the Budget measures to improve their finances over the next year and a further 51% expected to see no change. More broadly, the gain in the headline index was supported by improved expectations around family finances and the economic outlook.
This week's speech from Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle (The State of the Economy) was broadly consistent with recent commentary. The slowing in economic growth over the second half of 2018 was attributed to reduced household consumption expenditure, though mostly associated with weakness in income growth and entrenched expectations for that situation to continue, giving only some acknowledgment of a negative wealth impact from declining property prices. Again, labour market strength was highlighted and was assessed to be a surprising development given the slowing in output growth. Given this 'tension' as it has been referred to by the RBA, the Board has shifted to a data dependent approach (see here). Next month's updated forecasts will provide an indication of how the RBA anticipates the situation will evolve, potentially opening the door for a further dovish shift in its guidance.
Friday's half-yearly RBA Financial Stability Review noted that economic conditions, despite the recent slowing and housing market correction, were still consistent in supporting stability within the financial system. Notwithstanding, the risks for financial stability were highlighted as weakness in the global economic outlook and vulnerabilities in financial markets, high levels of household debt, further weakness in property prices and culture and governance concerns within the nation's financial institutions.
Though global factors are likely to pose the greatest risk to the domestic economy, developments within the housing market tend to garner more focus. Here, the RBA noted that further price declines were likely as the large pipeline of supply comes onto the market, which could potentially lead to an increased tightening in credit conditions. In mitigation, declines in property prices are occurring while interest rates and the unemployment rate are low. Meanwhile, this week's housing finance data for February showed a surprising 2.7% month-to-month increase, with lending to owner-occupiers up by 3.4% and by 0.9% to investors (see our analysis here). This is likely to prove temporary given continued weakness in the more timely property price and auction clearance data.
Though global factors are likely to pose the greatest risk to the domestic economy, developments within the housing market tend to garner more focus. Here, the RBA noted that further price declines were likely as the large pipeline of supply comes onto the market, which could potentially lead to an increased tightening in credit conditions. In mitigation, declines in property prices are occurring while interest rates and the unemployment rate are low. Meanwhile, this week's housing finance data for February showed a surprising 2.7% month-to-month increase, with lending to owner-occupiers up by 3.4% and by 0.9% to investors (see our analysis here). This is likely to prove temporary given continued weakness in the more timely property price and auction clearance data.
