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Macro Watch: the dawn of a China easing cycle?

Your guide to this week's big economic events 

Key points

  • China’s economic activity is slowing, and policymakers appear poised to act if necessary
  • In the US, strong consumption continues to offset weak business activity
  • As the UK’s Brexit election gears up, GDP, inflation, labour and housing data will be released

China: controlled slowdown to continue

China GDP growth has slowed gradually in the last 18 months. The 6% rate in Q3 sustained the trend of steady decline: from an average of 6.6% in 2018 to 6.4% in Q1 and then 6.2% in Q2. Official figures are likely to meet the government’s 6%-6.5% target for this year, but alternative measures suggest that underlying growth has weakened to 4%-4.5%. The structural transformation of the Chinese economy – from an investment-intensive, export-oriented model to one based on domestic demand – and trade tensions with the US are probably the main causes. Policymakers’ measured and targeted responses seek a balance between supporting growth and de-risking, as indicated by their last move – a 5bp cut to the one-year medium-term lending facility rate. It has done little to ease conditions but signals that the authorities are ready to act if necessary. Activity data for October should point to stabilisation: retail-sales growth should remain at 7.8% year-over-year, below the prevailing rates of in 2018, reflecting labour-market concerns, while industrial-production growth is expected to decline to 5.4% from 5.8%, partially reversing September’s advance, reflecting recent mixed Purchasing Managers Index (PMI) readings.

Figure 1. China monetary policy: the start of an easing cycle? 

 

Source: Refinitiv, the People's Bank of China, as of October 2019. 

Japan: tax tolls activity

The nation’s composite PMI signalled contraction in October, as it fell to 49.1 from 51.5 in the previous month. In particular, the services index edged lower to join the manufacturing gauge, suggesting that the value-added tax (VAT) increase in October affected consumer-facing businesses. This week’s Eco Watchers survey will provide more insight into the early impact of the VAT hike on activity and sentiment. Its current-conditions component is likely to show a partial reversal of recent gains, falling to below its long-term average of 45.1 from 46.7 in September. By contrast, GDP data will provide a backward-looking picture of conditions before the rise in VAT. Consensus expectations are for GDP to increase by 0.9% on a quarter-over-quarter annualised basis in Q3, after posting 1.3% in Q2. The front-loading of purchases before the new VAT rate took effect probably boosted demand in Q3 and will likely cause Q4 output to soften. The Bank of Japan held rates steady at its October meeting. The next round of stimulus, should it be needed, will probably be mainly fiscal.

Figure 2. Consumers losing some stream 

Source: Refinitiv, Japan Ministry of Internal Affairs and Communications, as of October 2019. 

US: consumers v business

Recent US economic data have been mixed: a strong consumer sector has been blunted by weak business activity. More data is scheduled for release this week – consumption (retail sales and consumer price inflation) and business sentiment and activity (NFIB Small Business Optimism survey, Empire State Manufacturing survey and industrial production). Following a series of solid readings, retail sales suffered a set-back in September. Yet, core control retail sales (which excludes autos, food services, building materials and gasoline) increased at a quarterly annualised rate of 6.8% in the three months to September. We expect another decent increase in retail sales in October, reflecting solid fundamentals (a resilient labour market). By contrast, industrial production probably remained subdued in October – consensus forecasts point to a 0.3% decline month-on-month, in line with indications from recent surveys. Notably, the manufacturing ISM index remained in contractionary territory in October but edged up to 48.3 from 47.8 in the previous month.  That said, the overall performance of the US economy has remained decent, given that consumption makes up 70% of it. This has vindicated the Federal Reserve’s (Fed’s) newly adopted neutral stance, at least for now. And so, when Fed chair Jerome Powell delivers his annual testimony to the Joint Economic Committee of Congress on Wednesday, he will probably reiterate the appropriateness of the bank’s current monetary policy stance.

Figure 3. US economic growth slows as business investment contracts in Q2 and Q3

Source: Refinitiv, US BEA, as at October 2019.

UK data deluge ahead of general election 

There’s a plethora of data releases scheduled for release in the UK this week: GDP, labour market, consumer price inflation, RICS housing and retail sales. Consensus forecasts suggest that GDP will increase by 0.4% quarter-on-quarter in Q3, after a 0.2% contraction in the previous quarter. GDP data have been quite volatile on a quarter-to-quarter basis, owing to the ever-shifting Brexit deadlines. Beyond this volatility, the underlying trend has softened, with surveys now suggesting underlying growth is close to zero. The breakdown of GDP is likely to confirm the divergence between solid consumption and subdued business investment. The dichotomy has been particularly pronounced in the UK, probably due to multiple sources of uncertainty weighing on business decisions (i.e. Brexit and international trade policies). As for more forward-looking data, labour market and retail sales are likely to continue to paint a fairly positive picture for the time being. However, some recent surveys have suggested that negative business sentiment is starting to affect hiring decisions.

Figure 4. Business investment has stalled in recent years

Source: Refinitiv, Office for National Statistics, Bank of England, Lloyds, as at October 2019.

Other events we're watching

  • Betting against car tariffs. The US administration will decide whether to impose tariffs on auto imports before 14 November. It has already delayed the duties by 180 days after a Section 232 investigation identified auto imports as a threat to US national security. Another postponement is the likeliest outcome.
  • The Reserve Bank of New Zealand is expected to cut its main interest rate by 25bps to 0.75% on Wednesday, following a relatively rapid 75bps of easing this year.
  • The 11th BRICS summit will convene in Brazil on Wednesday and Thursday, focusing on the theme: Economic growth for an innovative future.
  • Markets expect that the Mexican central bank, Banxico, will follow in the steps of the Fed and cut rates this week (by 25bps). Over the summer, it cut rates by 50bps.

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