Key insights from the week that was.
The Q1 CAPEX survey provided an important update on equipment investment in the 3 months to March as well as business investment intentions for 2018/19 and 2019/20. In Q1, equipment investment disappointed, falling 0.5% to be only 2.4% higher over the year. This outcome creates downside risk for our Q1 GDP forecast of 0.6%, particularly as it follows a disappointing read on construction investment last week.
Intentions for 2018/19 were essentially unchanged from the previous estimate, a gain of 4% from 2017/18 projected. Our assessment of estimate 2 for 2019/20 is that it is consistent with a gain of only 1%. By industry, this comes as a result of increased investment in mining; little change for services; and a reduction in spending by manufacturers.
All told, the outlook for growth in investment remains subdued. We are mindful that the surprise Coalition victory in the May Federal election could see a lift in sentiment, sparking stronger investment. Partial data in coming months will therefore be a focus.
The April reading for dwelling approvals also disappointed this week, activity falling 4.7% in the month and 24%yr. April’s downside surprise is likely, in part, due to the timing of the Easter and ANZAC day public holidays. That said, the outlook is clearly weak, with recent declines broad based across the industry’s sub-sectors. As for business investment, the next few months will make clear the degree to which the election and declining interest rates could offer housing a reprieve. We remain of the view that residential investment will contract through both 2019 and 2020, and furthermore, that house prices will take time to stabilise.
Over in New Zealand, Budget 2019 was released. Spending was focused on the household sector, but there was nothing for housing or to support flagging business confidence. The New Zealand Government is more positive on the medium to long-term outlook than Westpac NZ. Hence there is a meaningful risk of the out years disappointing the Government’s forecasts.
For the US, the economic data flow has been very light. The market has therefore instead focused on uncertainty around trade, the DXY index gaining 0.5% to be near its 2019 high; the S&P500 falling 1.5% to Wednesday’s close (before recovering 0.2% on Thursday); and the cash/10-year curve inverting further as the US 10yr yield declined to 2.18% currently. The market has now priced in a federal funds rate cut by October and two further cuts by late-2020.
To us, there is currently no economic basis for ‘insurance’ cuts from the FOMC. Employment growth is very strong and real wages growth robust. Further, the economy’s wealth is at all-time highs and, thanks to the sharp drop in benchmark government yields, borrowing costs for the economy are at historically-low levels. At trend growth led by the consumer remains the most likely outcome for the US.
Federal Reserve Vice Chair Clarida did open the door for easier policy this week, but such an outcome would be conditional on there being a need. To warrant action, persistent disappointment for inflation (which the Committee does not currently expect) and/or material downside risks to the US outlook would need to eventuate. Given the market’s unease and President Trump’s decision this morning to impose tariffs on Mexico, the latter is arguably the primary concern.
Finally in Europe, the provisional results of EU Parliament elections indicate a coalition of centrist parties will retain majority status. Yet, as foreshadowed by the polls, the centre-right EPP and centre-left S&D, the two largest parties, saw a significant decline in votes, while gains were seen for the centre liberals ALDE/EM, and populist parties. Voting fragmentation has clear implications for national politics.
Of immediate concern is Italy, where EU Parliament voting indicated a sizable pick-up for the far-right Lega party, largely at the expense of their governing coalition partner Five-Star. Consequently, the Lega’s leader Salvini is now enforcing his agenda on new infrastructure and a ‘flat’ tax, threatening a breakdown of the coalition if demands are not met. As such, the possibility of an early election in September remains significant, and the ongoing budget dispute with the EU is likely to heighten.
