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Best global growth forecast in 7 yearsStrongest Chinese house prices in 21 monthsConsumer confidence; RBA Board minutes; Economic growth; China house prices
Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.2 per cent – the first lift in 5 weeks – to 121.5, above the average of 114.0 since 2014 and average of 113.0 since 1990.
Reserve Bank Board minutes: The minutes from the July 3 Board meeting were issued. The Board’s neutral policy bias remains intact with a period of record low interest rate stability ahead for the foreseeable future. However, the phrase “the next move in the cash rate would more likely be an increase than a decrease” was reinstated after being removed last month.” However, “there was no strong case for a near-term adjustment in monetary policy.”
Global growth: The International Monetary Fund (IMF) left its forecast for global economic growth unchanged at 3.9 per cent in 2018 and 2019, above the 40-year average growth rate of 3.5 per cent. If realised it would be the fastest pace of growth in seven years. While there was no update for Australia, economic growth is forecast to grow by 3.0 per cent in 2018 and 3.1 per cent in 2019.
China house prices: China’s new house prices rose by 1.1 per cent in June, up from 0.8 per cent in May. It was the strongest growth rate in 21 months. Over the year to June, prices rose by 5.0 per cent in the year to June (forecast +4.7 per cent), up from 4.7 per cent in May. 
What does it all mean?
The global economy is optimistically forecast by the IMF to grow above its long-term trend pace at the strongest levels since 2011. However, economic data releases have softened, especially in Europe, the UK and Japan, in recent months, as reflected in the IMF’s latest assessment. Elsewhere, growth in emerging market heavyweights, India and Brazil, were also downgraded.
With global growth peaking late last year and momentum fading, growth leadership has become more dependent on the US (forecast to grow by 2.9 per cent) and China (+6.6 per cent), despite escalating tariff frictions between the world’s two largest economies. The IMF’s Chief Economist Maurice Obstfeld acknowledged this, “The risk is that current trade tensions escalate further…with adverse effects on confidence, asset prices, and investment…is the greatest near term threat to global growth.”
Just when you think the Chinese economy is slowing, another data release suggests otherwise. House prices accelerated at the fastest growth rate in 21 months in June, despite government efforts to curb property market speculation.
Aussie consumer confidence lifted for the first time in five weeks, complementing the Westpac-Melbourne Institute’s monthly survey for July, which showed that sentiment was the best in 4½ years.
Importantly, the “estimate of family finances over the next year” sub-index rose to its highest level in a month, reflecting better household optimism. Prospects for income tax cuts, better job security and the potential wealth effect from an outperforming Aussie sharemarket has brightened sentiment. And petrol prices are the lowest in two months, coinciding happily with the school holidays.
What do the figures show?Consumer Sentiment
The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.2 per cent – the first lift in five weeks – to 121.5, above the average of 114.0 since 2014 and average of 113.0 since 1990.
All components of the index increased last week:
The estimate of family finances compared with a year ago was up from 106.7 to 108.3;
The estimate of family finances over the next year was up from 126.1 to 126.7;
Economic conditions over the next 12 months was up from 111.7 to 111.9;
Economic conditions over the next 5 years was up from 115.9 to 117.3;
The measure of whether it was a good time to buy a major household item was up from 139.9 to 143.2.
The measure of inflation expectations rose from 4.0 per cent to 4.3 per cent.
Reserve Bank March Board minutes
Last paragraph: “Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
Interest rate outlook: “…members continued to agree that the next move in the cash rate would more likely be an increase than a decrease.”
On inflation: “Inflation remained low, reflecting low growth in labour costs and strong competition in retailing.”
On the labour market: “Much of the strength in employment growth over recent years had been in the health and social assistance industry, where about three-quarters of people work in the private sector. In recent quarters, employment had expanded in a broader range of industries, including construction, manufacturing and professional, scientific and technical services.”
On wages growth: “Overall, leading indicators of labour demand pointed to above-average employment growth over the second half of 2018. Consistent with this, members noted that wage pressures had been building in some parts of the economy but had not yet become broadly based.”
On household debt: “Survey data indicate that much of Australian household debt is owed by higher-income and middle-aged people, who tend to have more stable employment and often larger savings buffers. However, members recognised that a material share of household debt is held by lower-income households, which generally have higher debt relative to their income.”
On funding costs: “…funding costs for the major banks had risen a little over 2018, reflecting the higher bank bill swap rate over this period, but had remained low relative to history. Banks’ net bond issuance in 2018 had been strong.”
On the housing market: “Members observed that prices in Sydney and Melbourne had fallen the most for more expensive properties, while prices of lower-priced properties had been little changed, consistent with the typical pattern of larger fluctuations in prices at the higher end of the market. In the other state capitals, housing prices had been fairly steady, with the exception of Hobart, where prices had picked up markedly given strong demand and supply constraints.”
On trade: “An escalation of trade tensions could harm global growth by undermining confidence and delaying investment decisions and could dampen international trade.”
Global economy
The IMF’s World Economic Outlook Update for July 2018 has forecast the following economic growth for 2018 (previous forecasts April 2018):
Global growth unchanged at 3.9 per cent;
Advanced economies down by 0.1 percentage points to 2.4 per cent;
United States unchanged at 2.9 per cent;
Euro Area down by 0.2 percentage points to 2.2 per cent;
Germany down by 0.3 percentage points to 2.2 per cent;
Japan down by 0.2 percentage points at 1.0 per cent;
UK down by 0.2 percentage points to 1.4 per cent;
Emerging market and developing economies unchanged at 4.9 per cent;
China unchanged at 6.6 per cent;
India down by 0.1 percentage point at 7.3 per cent;
Russia unchanged at 1.7 per cent;
Brazil down by 0.5 percentage points to 1.8 per cent.
As of April, the IMF projects the Australia economy to grow by 3 per cent in 2018 and 3.1 per cent in 2019.
China house prices
China’s new house prices rose by 1.1 per cent in June, up from 0.8 per cent in May. It was the strongest growt rate in 21 months. 63 cities prices increased in June, up from 61 in May.
Over the year to June, new house prices rose by 5.0 per cent (forecast +4.7 per cent), up from 4.7 per cent in May.
Among the 70 large and medium-sized Chinese cities, the sales prices of new commercial residential buildings in four first-tier cities were flat, and the sales price of second -hand residential houses rose by 0.1 per cent in June.
Over the year to June, the sales prices of new commercial residential and second-hand residential in 31 secondtier cities rose by 6.3 per cent and 4.6 per cent, respectively, and the growth rate was 0.9 and 0.2 percentage points higher than May.The sales prices of new commercial residential and second-hand residential in 35 third-tier cities rose by 6.0 per cent and 4.3 per cent, respectively, both of which were the same as in May.
What is the importance of the economic data?
The International Monetary Fund (IMF) releases its World Economic Outlook in January, April, July and October each year. The Fund’s economic growth forecasts are widely observed by economists and market participants. The IMF’s primary purpose is to ensure the stability of the international monetary system – the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.
China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
What are the implications for interest rates and investors?
The Reserve Bank remains optimistic about the Aussie economy. The first paragraph of the Board minutes even suggested that policymakers were a little surprised that March quarter growth was so strong, “the quarterly growth rate of 1 per cent has been little stronger than the Bank’s forecast of three months earlier.”
That said, the Bank is in no rush to lift interest rates, despite policymakers’ explicit preference to do so, and their positive overall assessment of domestic economic conditions.
The minutes also implied that the Reserve Bank isn’t too concerned about rising bank funding costs, tightening lending conditions, out-of-cycle mortgage rate hikes by smaller banks, or falling housing prices. But, in a special discussion on household debt, acknowledged that “households with high debt levels are more vulnerable to economic shocks and therefore more likely to reduce consumption in the face of uncertainty.”
And of course the other uncertainty is trade protectionism and the potential drag on global growth. While the IMF trimmed its forecasts around the margin, it still remains upbeat about growth this year, despite the trade wars. However, the Reserve Bank is concerned that “an escalation of trade tensions could harm global growth by undermining confidence and delaying investment decisions and could dampen international trade”.
And while today’s Chinese house prices data was stronger-than-expected, implying still-firm demand for Aussie iron ore, coal and base metals, the Board acknowledged “growth in the Chinese economy appeared to have moderated a little.”
CommSec expects official interest rates to be stable until early 2019.
Published by Ryan Felsman, Senior Economist, CommSec