Weekly Economic Commentary

Transcription

1 LPL FINANCIAL RESEARCH Weekly Economic Commentary August 13, 212 China Has Already Landed Softly John Canally, CFA Economist LPL Financial Please see the LPL Financial Research Weekly Calendar on page 3 1 After Raising Rates From 29 to Late 211 to Cool Growth and Combat Inflation, the People s Bank of China (PBOC) Is Now Cutting Rates Again Highlights We continue to expect a soft landing growth between 7% and 8% in 212. Our forecast remains below consensus. Additional monetary stimulus in China (rate cuts and cuts in reserve ratio requirements) could happen at any time, and markets would welcome these additional steps. China s exports to other large emerging market economies have accelerated recently, and we believe this will continue. China: Lending Rate: 1-Year, % per annum Source: People's Bank of China, Haver Analytics 8/13/ Although it may be a stretch for China to reach our forecast of 8 9% real gross domestic product (GDP) growth in 212 (first published in November 211), we continue to expect a soft landing growth between 7% and 8% in 212. As was the case when we first made our 212 forecast for China s economy in late 211, our view on China s economy remains below consensus. The consensus still expects 8 8.5% real GDP growth in China in 212. The so-called hard landing scenario in China is for 5 6% growth this year. This forecast receives frequent attention in the financial media, even though the lowest forecast among 28 professional economists and market participants for China s economy in 212 is 7.6%. Gradual Transition to Consumer-Oriented Economy China's economy, as measured by real GDP, grew by more than 1% per year between 22 and 28, before slowing to a hard landing growth rate of just over 6% in late 28. For perspective, during the worst of the Great Recession, China s real GDP bottomed out at around 6.5% growth, and a return to that pace of growth would be considered a hard landing. A sizable portion of the 1%-plus growth seen between 22 and 28 was export oriented. But China is now slowly transitioning to a more consumer-oriented versus an export-oriented economy, and Chinese authorities have made it clear that the transition is likely to occur against a backdrop of much slower economic growth, likely in the % range. China's economy grew 7.6% between the second quarter of 211 and the second quarter of 212. The reading represented a deceleration from the 8.1% year-over-year reading in the first quarter of 212, and it was also slightly below published expectations. The latest batch (reported last week [August 6 1]) of Chinese economic data (for July 212) triggered more talk of a hard landing. The meager 1.% year-over-year gain in Chinese exports in July 212 versus July 211 was especially disturbing. The slowdown in China s economy this year can be attributed to several factors, including the lagged impact of monetary policy tightening by Chinese authorities in 21 and 211, the fiscal crisis and economic slowdown in Europe, and, to a lesser extent, economic slowdowns in China s emerging market trading partners this year. Since late 211, China has been taking policy actions to offset or preempt the slowdown but, thus far, the actions have not halted the deceleration in the economy. Member FINRA/SIPC Page 1 of 5

2 2 China s Exports Have Slowed China: Total Cumulative Exports, Source: China Customs, Haver Analytics 8/13/12 3 And Exports to Europe Have Turned Negative China: Cumulative Exports to European Union, Source: China Customs, Haver Analytics 8/13/12 4 But China s Exports to North American Economies Have Held Up Well China: Cumulative Exports to North America, Source: China Customs, Haver Analytics 8/13/12 Monetary Policy Efforts In response to the impact of the global Great Recession in 28 29, China eased both monetary and fiscal policy in 28 and 29. But China was one of the first nations to emerge from the Great Recession, and surging commodity prices, leading to the threat of rising food prices in China, prompted Chinese authorities to begin tightening monetary policy in late 29 and early 21, to cool prices and economic growth. They continued to tighten policy first via making Chinese banks hold more reserves against the loans (reserve ratio requirements) they made and later by raising the official lending rate until mid-211. As noted above, since late 211, Chinese authorities have been in the process of reversing some of the tightening put in place between late 29 and mid-211. The People s Bank of China (PBOC) lowered reserve ratio requirements beginning in late 211 and began cutting official lending rates in June of 212. To date, these measures have not had any appreciable impact on the Chinese economy, and the market is calling for more monetary policy in addition to a dose of fiscal stimulus to halt the deceleration in the economy. Slowdown in Europe The slowdown in Europe has also impacted the Chinese economy. In recent years, roughly 2% of all Chinese exports have been destined for Europe. And with Europe in recession, overall Chinese export growth has slowed dramatically, to just 1.% year-over-year in July 212. In the first seven months of 212, China s exports to the European Union (EU) are running 4% below the same period of 211. By comparison, for most of 21 and 211, China s exports to the EU were running 2 4% higher than the previous year. To put the slowdown in China s exports to Europe in perspective, China s exports to Asia (year-to-date 212 versus year-to-date 211) are still running 1% above year-ago levels, and China s exports to North America are 14% above year-ago levels and are accelerating. Chinese officials remain concerned about Europe and do not see European leaders making significant progress anytime soon, leaving a key source of Chinese export growth, and overall economic growth, a key question mark over the medium term. Emerging Markets a Bright Spot The deceleration in emerging markets growth (outside of China) is also a cause for concern for Chinese policymakers, but the outlook here is a bit brighter. Actual growth and prospects for growth in emerging market economies have come down this year. At the start of the year, emerging markets (including China) were expected to grow at around 6 7%, and at mid-year, those forecasts have come down to around 5 6% for 212. China s exports to the eight largest emerging market economies outside of China (Brazil, India, Russia, Mexico, Turkey, Indonesia, Poland and Venezuela) account for over 11% of its overall exports, and are growing at 1% versus a year ago. While they have slowed from much faster growth rates in (3 5%), China s exports to other large emerging market economies have accelerated recently, and should continue to LPL Financial Member FINRA/SIPC Page 2 of 5

3 LPL Financial Research Weekly Calendar U.S. Data Fed Global Notables Aug Japan: GDP (Q2) 14 Aug Small Business Optimism Index (Jul) PPI (Jul) Retail Sales (Jul) Business Inventories (Jul) Eurozone: GDP (Q2) Germany: ZEW Index (Aug) Eurozone: Industrial Production (Jul) 15 Aug CPI (Jul) Kocherlakota Empire State Mfg. Index (Aug) Industrial Production (Jul) Capacity Utilization (Jul) NAHB Index (Aug) 16 Aug Initial Claims (8/11) Housing Starts (Jul) Kocherlakota Eurozone: CPI (Jul) Philly Fed (Aug) 17 Aug University of Michigan Consumer Sentiment (Aug) Leading Indicators (Jul) China: Home Prices (Jul) Eurozone: Trade Balance (Jun) Hawks: Fed officials who favor the low inflation side of the Fed s dual mandate of low inflation and full employment Doves: Fed officials who favor the full employment side of the Fed s dual mandate China s Data: Unlike many other nations, China does not have a set schedule for the release of its monthly economic data, and Chinese authorities typically only provide a range of possible release dates for the data. Typically the bulk of the economic data in China is released between the 9th and 15th day of the month. For example, last week (August 6 1) saw China release July data on consumer prices (CPI), producer prices (PPI), new loan growth, money supply, industrial production, exports, and imports. There is another round of data releases at the end of each month (usually the last few days of the month), as China and private sector entities in China release the purchasing managers index (PMI) on manufacturing. On balance, the economic data in China is not as transparent as economic data in the United States and the developed world, and it is subject to a great deal of political nudging as well. Still, it is much timelier than most data in the United States, and financial market participants pay very close attention to this data. People s Bank of China (PBOC): Unlike most other central banks around the globe, the PBOC does not have set dates for policy decisions. It can change policy at any time, and often does. The PBOC has announced policy changes on the weekend and on holidays [Christmas Day 21, Tomb Sweeping Day in China (April 211)], and generally announces changes in the early morning hours (EST), after the end of the trading day in China and before trading begins in the United States. According to the PBOC English language website, in addition to setting monetary policy, the PBOC also regularly intervenes in Chinese money markets, draining and adding reserves as it sees fit. The PBOC is also charged with managing China s currency, the Renminbi, and managing China s foreign exchange and gold reserves. The PBOC is highly political, and at this point in its history, can be viewed as an arm of the Chinese government that merely implements monetary policy, rather than both formulating and implementing policy. LPL Financial Member FINRA/SIPC Page 3 of 5

4 accelerate. Why? Most other emerging market central banks have also been cutting interest rates and lowering reserve requirements over the past nine months or so to stimulate growth. Monetary policy often works with a lag, so emerging market economies are likely to reaccelerate in the coming quarters, helping to lift Chinese exports, and the overall Chinese economy as well. On balance, markets will likely remain concerned about a hard landing in China for the foreseeable future. Additional monetary stimulus (rate cuts and cuts in reserve ratio requirements) could happen at any time (see box on page 3), and markets would welcome these additional steps. Market participants are also calling for additional fiscal stimulus from Beijing as well, to complement the additional monetary policy. With a transition to new leadership in China this fall, markets remain concerned that China will fail to live up to its promise of 7 8% growth over the long term. n LPL Financial Research 212 Forecasts GDP 2%* Federal Funds Rate %^ Private Payrolls +2K/mo. Please see our 212 Outlook for more details on LPL Financial Research forecasts. IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. * Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. ^ Federal Funds Rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Private Sector the total nonfarm payroll accounts for approximately 8% of the workers who produce the entire gross domestic product of the United States. The nonfarm payroll statistic is reported monthly, on the first Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity. It doesn t include: - general government employees - private household employees - employees of nonprofit organizations that provide assistance to individuals - farm employees The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risk including loss of principal. International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors. China CPI: In total there are about 6 "national items" used for calculating the all-china CPI. The list of items is revised annually for representativeness based on purchases reported in the household surveys. The number of items can change from year to year, but rarely by more than 1 in any given year. LPL Financial Member FINRA/SIPC Page 4 of 5

5 The Empire State Manufacturing Index is a seasonally-adjusted index that tracks the results of the Empire State Manufacturing Survey. The survey is distributed to roughly 175 manufacturing executives and asks questions intended to gauge both the current sentiment of the executives and their six-month outlook on the sector. The NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as "high to very high," "average" or "low to very low." Scores from each component are then used to calculate a seasonally adjusted index where any number over 5 indicates that more builders view conditions as good than poor. The Michigan Consumer Sentiment Index (MCSI) is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy. The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services. The index of leading economic indicators (LEI) is an economic variable, such as private-sector wages, that tends to show the direction of future economic activity. ZEW Survey is a main indicator of investors' confidence. It is calculated on basis of 35 analysts' and institutional investors' polling. The indicator reflects the difference between analysts who are optimistic about forthcoming economic development of Germany within six months and those who are pessimistic. The Survey is used for German economic prospects estimation. ZEW Survey growth causes the euro growth. This research material has been prepared by LPL Financial. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC/NCUA Insured Not Bank/Credit Union Guaranteed May Lose Value Not Guaranteed by any Government Agency Not a Bank/Credit Union Deposit Member FINRA/SIPC Page 5 of 5 RES Tracking # (Exp. 8/13)