With the global economic recovery underway, attention turned to the shape of the recovery. The jury remained out on the likely strength and sustainability of recovery, particularly for the G3 countries where data remained mixed. What seemed clear was that growth in developing nations is picking up nicely and their recovery prospects are much more certain compared to the major countries.
US real gross domestic product (GDP) rose by an annualised 3.5% in the September quarter, the first sign of expansion since the June 2008 quarter. A range of indicators suggested that a patchy sort of recovery is underway. The manufacturing ISM indicator unexpectedly dipped slightly to 52.6 in October, while the non-manufacturing ISM showed a solid rise to 50.9. Auto sales plunged following the end of the cash for clunkers scheme, leading to a 1.5% month on month (mom) fall in retail sales in September, while ex-auto sales rose by a healthy 0.5% mom. However, consumer confidence fell during the month. Housing market indicators were mixed. Housing starts, permits, new home sales and mortgage applications were weaker than expected, while existing home sales were strong and house prices rose for the fourth consecutive month in August on the Case-Shiller index. Employment fell by more than expected in September and the unemployment rate rose to a 26-year high of 9.8%.
In Europe, business surveys pointed to an economic expansion, with the EU Purchasing Managers' Index rising to 50.7 in October, its highest level in 18 months. Germany's Ifo business climate index continued to trend higher, reaching a 13 month high of 91.9 in October. Industrial production in August continued to increase from its lows earlier in the year with gains of 11%, 6% and 5% in Italy, Germany and France respectively. The weakest major economy in the region was the UK, which recorded a surprising fall in GDP of 0.4% quarter on quarter (qoq) in the September quarter, while industrial production fell by 2.5% mom in August.
The recovery remained strongest in Asia, helped by the bounce in global trade. Industrial production in Japan was up 22.4% in August from its low in February, while consumer sentiment reached a two year high. China GDP rebounded by 8.9% year on year (yoy) in the September quarter, with the country showing exports recovering, industrial production up 13.9% yoy and retail sales up 15.5% yoy.
The Reserve Bank of Australia (RBA) became the first major central bank to raise interest rates, increasing its cash rate by 25 basis points (bps) to 3.25%. Norway's central bank raised rates later in the month by 25 bps to 1.5%.
The global economic recovery is expected to broaden and intensify over the next six months. However, we will need to see a more meaningful pick-up in final demand, otherwise the recovery so far - driven by temporary fiscal stimulus and changes in inventories - will not be sustained.
Economic data pointed to further economic expansion in the September quarter. However, to date, we've seen a wide gulf open up between the very positive confidence indicators compared with measures of actual economic activity, which (outside of housing) remain fairly subdued.
Consumer confidence rose to a 22-month high in October on the ANZ-Roy Morgan index, but we've seen a pretty modest increase in spending so far. Retail sales rose by 1.1% mom in August and ex auto sales rose by 1.2% mom. However, this follows a weak couple of months and nominal trend sales growth is running at about 2.5 yoy.
Business confidence slipped a touch in October on National Bank's survey. However, the own activity indicator reading of an above-average net 31% is still consistent with annual real GDP growth of circa 4%. The BNZ Capital - Business NZ Performance of Manufacturing Index rose to 51.7 in September, the highest since February 2008. The Quarterly Survey of Business Opinion showed a surge in confidence and forward looking indicators. However, this reflects the weak position of the previous survey and is a reminder of how far and fast confidence has rebounded in the last three months.
House sales continued their rising trend, up 44% yoy in September, as did house prices. The REINZ Monthly Housing Price Index rose by 1.9% mom in September and is now up 7.9% from its low in January. Consistent with improving trends in the housing market, dwelling consents continued to improve. While year-on-year comparisons remain weak, the number of consents excluding apartments was up 25% in October from the low reached early this year.
The consumer price index (CPI) rose by 1.3% qoq in the September quarter and by 1.7% yoy, the lowest annual increase in five and a half years. That said, underlying measures range from 2.0% to 2.8% and annual non-tradeables inflation at the bottom of the recession only fell to 3.0%.
At its official cash rate (OCR) review, the Reserve Bank (RBNZ) of New Zealand the left the OCR unchanged at 2.5%. However, it firmed its policy tone by removing any reference in its statement to a possible lower OCR and brought forward the first rate hike from the latter part of 2010 to the second half of 2010.
We expect to see 'harder' economic data like GDP and retail sales improve over the next six to nine months, as currently suggested by the survey evidence. The stimulatory policy environment and better global backdrop should support this trend.
Read the full AMP Capital Investors October 2009 Investment Brief.