This week confirmed the central thesis of Lael Brainard's February 26th speech, "What Happened to the Great Divergence," where she argued that all major central banks are now pursuing very similar policy paths due to weak global growth. Last week, the ECB amended their asset purchase program. This week, the RBA and BOJ kept rates steady, while the Fed became more dovish. And there is no sign of any major bank tightening in the near future.
This week, the Bank of Japan maintained their current policy. BOJ head Kuroda stated lower rates were possible as a way to continue boosting inflation. But Japan still faces large problems. "Abenomics" took a big hit when the larger Japanese employers refused to increase pay by the amount requested, instead granting far smaller raises.
Japanese companies have markedly slowed the pace of wage growth in one of the worst blows to hit the Abenomics stimulus since it was launched in 2012.
As results of the annual "spring offensive" on wages poured in from across the manufacturing sector, many companies offered pay rises half the size of last year, and far below the pace needed to drive inflation to 2 per cent.
The results are a double blow to Shinzo Abe, prime minister, and the Bank of Japan. Lower wage rises not only mean less cash to fuel consumption, they also cast doubt on the credibility of the BoJ.
The BOJ has been arguing for a "virtuous cycle" of pay raises leading to increased spending. They're arguing straight from Keynes' marginal propensity to spend. Obviously, if the first half doesn't happen, then the second falls short. And that's exactly where the BOJ is now.
News from the UK was mixed. On the plus side, unemployment was 5.1%, while total pay increased a little over 2%. And the BOE offered a fairly positive assessment of the domestic economy in their policy announcement:
In the United Kingdom, underlying growth of private domestic demand remains solid. A tighter labour market and rising productivity are expected to support real incomes and consumption. Consumer confidence and most surveys of business investment are above historical averages. And, in the past month, changes in asset prices have generally been supportive for UK growth and inflation. The prices of risky assets have rebounded. Relative to the conditioning assumptions that underlay the projections published in the Committee's February Inflation Report, oil prices have risen and UK short-term interest rates and sterling have fallen. Sterling has depreciated by around 9% in effective terms from its peak in mid-November 2015.
The following table from the latest UK Inflation Report offers detail:
The BOE described household spending as "robust," and business investment as "significantly faster than the pre-crisis" level. The low unemployment rate should continue to support personal spending.
But there may be issues for the UK business sector: the latest Markit Manufacturing reading was 50.8 (a 34-month low), while the Service number was the weakest in three years (although it is still 52.7). Both numbers are in downtrends. The potential "Brexit" is the biggest issue facing UK business:
Set against that, there appears to be increased uncertainty surrounding the forthcoming referendum on UK membership of the European Union. That uncertainty is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth of aggregate demand in the near term. Overall, however, the Committee judges the outlook for domestic activity to be little changed from the time of the February Inflation Report, with GDP expected to grow at around average rates over the forecast period.
On the plus side, a declining sterling would help UK exporters, who, like their US counterparts, have struggled thanks to the high sterling/EU rate. But the UK business sector should probably experience continued uncertainty until the UK votes on the "Brexit."
EU news was very positive. First of all, industrial production increased 2.1%:
And construction increased 3.6%:
Employment also increased, this time by .3%. Analysts have been arguing that the EU economy is slowly declining. I disagree with this assessment. Household consumption was steady in 2015, while business investment increased. Exports held their own. The continent's main issue continues to be low inflation, which the ECB is attempting to cure.
Australia released their latest meeting minutes, where the bank noted the following domestic economic developments:
- Modest increases in resource export volumes
- A decline in mining investment
- Modest household consumption
- Declining housing investment
- A fair employment situation
- And low wage pressure
The RBA offered the following overall description of domestic events:
Based on the data available and in line with earlier expectations, growth appeared to have been slightly below average in the December quarter and over 2015 as a whole. There had been further indications of a rebalancing of activity towards the non-mining sectors of the economy. More recent data had suggested that the economy had continued to grow at a moderate pace in early 2016.
Australia is still in a sweet spot economically. While raw material extraction is a clear drag on growth, the economy continues to make adjustments, absorbing the slack.
Overall, international data continues slightly deteriorate around the edges. The US economy is grinding lower, Canada took a big hit from oil's price decline, Abenomics appears to be faltering, and China is moving into a slower growth posture. There is nothing definitively pointing towards recession. But it sure feels like that's where we're headed.