October 2018

Australia’s domestic economy still looks strong

In Australia, second-quarter GDP beat expectations – hitting 3.4% y/y – as strong exports and consumption helped offset lower investments. Strong commodities demand helped exports grow at a double-digit level, while the trade balance remained in surplus, supporting a surge in business confidence indicators.

Employment growth pushed the unemployment rate to a six-year low of 5.3%. But wage growth kept close to record lows, chipping away at consumer confidence and retail sales. Quarterly inflation hit a five-quarter high of 2.1% y/y as higher transportation costs cancelled out falling housing costs. But the overall trend remains muted, with core Consumer Price Index printing at 1.9% – still below the Reserve Bank of Australia’s (RBA’s) 2%-3% target range. Meanwhile, political concerns, curbs on foreign buyers and higher mortgage rates joined forces to erode housing market sentiment.

The domestic economy remains strong, supported by exports and consumption. Slower housing, low wage growth and muted consumer sentiment are still a worry – but a manageable one. The RBA believes growth and inflation will continue to gradually trend upwards towards its target ranges. The central bank judges that current interest rates are appropriate, indicating the next interest rate movement would be up–albeit not anytime soon.

The People’s Bank of China (PBoC) support fails to stall the slowdown of China’s economy

Moving north to China, the pace of economic growth slowed yet again. Second-quarter GDP slipped to a two-year low of 6.7% y/y as robust service sector growth failed to make up for weakness in the industrial sector and weaker investment spending. Key domestic data–including industrial production, fixed asset investment and retail sales – all kept close to record lows as weak demand and the negative impact of recent financial regulations weighed on domestic demand.

Money supply and new loan growth data also remained subdued, despite emerging efforts by the authorities to rev up demand. Purchasing Managers’ Index (PMI) numbers still look relatively robust, as do exports, which were up 12.2% y/y, as trade tensions have not yet dampened demand. Meanwhile, inflation reached a six-month high as both food and non-food prices increased.

The recent crackdown on shadow-banking activities and trade tensions have helped spark weaker economic growth, continued currency weakness and further declines in the stock market – which have all hit investor sentiment. In a nod to the risks, the authorities have eased recent asset management product implementation rules, while the PBoC has injected liquidity via medium-term lending facility and open market operations, expanded its approved collateral limits and initiated its countercyclical factors model to reduce currency volatility. But the economy continues to slow, with interest rates likely to remain low for now.

Solid growth in Singapore as government reaffirms growth forecasts

Across the water in Singapore, economic data was generally solid. Second-quarter GDP printed at 3.6% y/y as strong exports and services helped offset weakness in the construction sector. Exports remained relatively robust, although electronics exports were weak due to lower Chinese demand. This was also reflected in strong PMI and industrial production data, pointing to steady manufacturing growth.

The second-quarter 2018 unemployment rate remained low at 2.1%, but this failed to feed through into stronger retail sales. What’s more, signs of a recovery in property prices were cut short by the recent introduction of property cooling measures, which has already dampened transaction volumes. Meanwhile, headline inflation remained broadly stable at 0.6% y/y, core inflation jumped to a four-year high of 1.9%.

The steady upward growth rate has allowed the government to reaffirm its 2018 growth forecast range at 2.5%-3.5%. Global trade tensions and higher US interest rates remain key downside risks, but the government believes these can be mitigated and are unlikely to derail growth. And with core inflation rapidly moving into the Monetary Authority of Singapore’s target range, we’d expect the central bank to stick to its hawkish bias at the October monetary policy meeting.

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