Insights Edition 61, Winter 2017 - Article Three
An economic update from Colonial First State Global Asset Management.
What have been the major economic events in the last couple of months?
The Reserve Bank of Australia (RBA) Board met on 2 May and left the official cash rate on hold at 1.5%.
Q1 2017 inflation data was released, and rose by 0.5% per quarter, a touch below expectations (at 0.6% per quarter). This sees the rate of headline inflation move into the RBA’s 2%-3% target range for the first time since Q3 2014.
The main price pressures in Q1 2017 came from automotive fuels (+5.7% per quarter), medical and hospital services (+1.6% per quarter) and new dwelling costs (+1.0% per quarter). These price rises were partially offset by falls in furniture and household equipment/services (-1.0% per quarter) and recreation & culture (-0.7% per quarter).
The housing market saw more moderate gains in April, with month end figures from CoreLogic showing capital city home prices rose 0.1% per month and 11.2% per year.
No change in the Federal Funds rate is expected when the US Federal Reserve Open Market Committee (FOMC) meet in May 2017. An interest rate hike in June is around 70% priced in by markets.
The news flow in April centred on President Trump’s plan for tax reform and the need for Congress to pass a spending bill to keep the government funded till 30 September 2017.
On 26 April 2017, President Trump announced a list of objectives for tax reform. The main objectives included; cutting the federal income tax rate to 15% for corporations, small businesses and partnerships of all sizes, a one-time repatriation tax of 10% on corporate earnings currently offshore, the top individual tax rate would also be lowered to 35% from 39.5% and there could also be the removal of several high income taxes such as estate taxes and the alternative minimum tax.
The European Central Bank (ECB) met on 27 April 2017 with no change to policy. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of net asset purchases.
Risks to the economic outlook were seen to have “further diminished”, but remain to the downside. There was no change to the assessment of inflation with “underlying inflation pressures remain subdued and have yet to show a convincing upward trend.”
The Bank of England (BoE) did not meet in April. The next meeting will be held on 11 May. Prime Minister Theresa May called a surprise snap election for 8 June, well ahead of the scheduled end of her term in 2020 and despite an earlier promise not to call an early election. This should help strengthen and shore up support for her Brexit plan.
The European Council published a set of guidelines to govern the EU’s Brexit negotiations with the UK. In short, the principle to the strategy is “a non-member of the Union that does not live up to the same obligations as a member, cannot have the same rights and enjoy the same benefits as a member”.
Q1 2017 GDP data was released with growth of 6.9% per year recorded, slightly ahead of expectations and Q4 2016’s reading of 6.8%. Improved global demand, domestic infrastructure spending and strength in the property market helped the higher than expected reading.
Other economic data also showed upside surprises, with Industrial Production (+7.6% per year), Retail Sales (+10.9% per year) and Fixed Asset Investment (+9.2% per year).
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