Ai Group Economics Weekly, 11 October 2013

International economic developments

This week the IMF released its latest half-yearly World Economic Outlook, which details the organisation’s forecasts for all major world economies. The IMF characterizes the world economy in 2013-14 as “in low gear”, with downside risks persisting, but it nevertheless expects global output and trade growth to pick up pace in 2014. For the developed economies, the IMF expects growth of 1.2% p.a. in 2013, improving to 2.0% in 2014 (unchanged from its July update). On these economies, the IMF notes that:

· the US is moving back into higher growth after “several quarters of solid private demand”;

· the Eurozone is “crawling out of recession” with growth rates likely to remain weak; and

· Japan is in a “vigorous rebound [in 2013] but will lose steam in 2014 as fiscal policy tightens”.

For the Asian region, the IMF notes that “China and a growing number of emerging market economies are coming off cyclical peaks. Their growth rates are projected to remain much above those of the advanced economies but below the elevated levels seen in recent years, for both cyclical and structural reasons.” The IMF expects China’s GDP to grow by 7.6% p.a. in 2013 and 7.3% p.a. in 2014 (revised down from 7.8% and 7.7% respectively since its July update). Taken together, the IMF now expects world GDP to grow by 2.9% p.a. in 2013 but to pick up to 3.6% in 2014, which is above the growth rate for 2012 (3.2% p.a.) but revised down slightly from the last estimates (3.2% and 3.8% respectively in the July update).

As a reminder of the risks to the global economy in the short term, the latest JP Morgan global output index (a composite of all global PMI measures including the Australian Industry Group’s Australian PMI and Australian PSI) fell to 53.5 points in September from 55.1 points in August, which was a three month low. Despite the drop in September however, this index is signaling mild expansion in global output in Q3 and is above the 50 point threshold separating expansion from contraction for a 15th consecutive month.

Australian economic developments

In the same World Economic Outlook, the IMF revised down its forecasts for the Australian economy, bringing them into line with the latest expectations of Australia’s Reserve Bank of Australia (RBA) and Treasury (see ‘Latest Australian Forecasts’ in our tables below). The IMF now expects Australian GDP to grow by 2.5% in 2013 and 2.8% in 2014, with the unemployment rate reaching an average rate of 6.0% in 2014. This represents a downward revision to the IMF’s forecasts for Australian GDP growth of half a percentage point in each year, since its last set of published numbers in April. This is similar to the downgrades by the RBA, Treasury and private sector economists over the same period and reflects the actual slowing observed in Australian economic activity over the course of 2013.

The all-important construction industry also showed a welcome improvement in September, with the Ai Group-HIA Australian PCI improving by 3.9 points to 47.6 points. This was the highest reading for this index since May 2010 but remained below the 50 point level that separates contraction from expansion. Of particular note in September, the activity sub-index moved above 50 points to 51.9 points for the first time since April 2010. This was driven by a big jump in the activity sub-indexes for the housing sector (to 61.5 points, its first positive reading since February 2013) and the apartments construction sector (to 57.7 points, its first reading above 50 points since May 2010). New orders also turned positive for the first time since May 2010, although the implied rate of expansion was marginal, at just 50.8 points in September. Also on the construction sector, the ABS released construction work done in the June quarter. Although somewhat dated now, this helps to flesh out further detail behind current construction industry trends. These data confirmed the shaky trajectory of the building industry’s recovery so far this year. In the June quarter, the total value of building work done (residential and non-residential building construction, excluding heavy engineering construction) fell by 0.2% q/q but remained 2.0% higher than a year earlier. New residential building fell by 0.7% but was up 5.9% p.a., while non-residential building activity fell by 0.3% q/q to be 1.6% lower in value than a year earlier.

Curiously however, the post-election boost to business confidence did not extend to households, with the Westpac-MI consumer confidence index falling by 2.3 points to 108.3 in September from 110.6 in August (values over 100 indicate net optimism in the Westpac survey). The detail beneath the headline suggests the fall relates primarily to reduced optimism regarding future conditions, with the indexes for ‘family finances in one year’ and ‘economic conditions in five years’ falling in this month (but remaining broadly positive with results just above 100 points in September). This may reflect increasing householder concerns about job security, unemployment and future income prospects.