Macro Economics - China is spearheading the global recovery

Overview

Global economy: World growth is now projected at 4.6% in 2010. Relative to the April 2010 World Economic Outlook (WEO), this represents an upward revision of about ½ a percentage point in 2010, reflecting stronger activity during the first half of the year. At the same time, Eurozone downside risks have risen sharply amid renewed financial turbulence.

Global economy:
World growth is now projected at 4.6% in 2010. Relative to the April 2010 World Economic Outlook (WEO), this represents an upward revision of about ½ a percentage point in 2010, reflecting stronger activity during the first half of the year. At the same time, Eurozone downside risks have risen sharply amid renewed financial turbulence.

The world economy expanded at an annualised rate of over 5% q-o-q during the first quarter of 2010. This was better than expected in the April 2010 WEO, mostly due to robust growth in Asia. Nevertheless, recent turbulence in the financial markets — reflecting a drop in confidence about fiscal sustainability, policy responses, and future growth prospects — has cast a cloud over the outlook. The fiscal sustainability issues in advanced economies that surfaced during May, fuelled by initial concerns over fiscal positions and competitiveness in Greece and other vulnerable Euro area economies remain a reason for worries.

In a comment to the release, managing director of the IMF Dominique Strauss-Kahn said that Asia has moved beyond its strength in exports to build a “second engine of growth” — based on investment and consumption. “Given that some of Asia’s major trading partners — in particular Europe and the US — are entering a period of lower growth rates, the need to nurture Asia’s domestic demand over the medium-term has become even more crucial”.

The IMF’s quarterly WEO also projected that China’s economy will grow 10.5% on an annual basis this year, up 0.5 percentage points from the prediction it made in April. Moreover the Fund predicted that the US will grow 3.3% this year, and the Euro zone will edge up 1% amid the sovereign debt crisis that could provoke tighter lending conditions, declining business and consumer confidence. As the Euro zone only follows in the wake of US and China at the moment, focus is now on the latter two.

US:
US Consumer Confidence Index which had declined sharply in June, retreated further in July. The Index now stands at 50.4 (1985 = 100), down from 54.3 in June. Consumer confidence faded further in July as consumers continue to grow increasingly more pessimistic about the short-term outlook. Consumers’ appraisal of the job market was also more negative. Those claiming jobs are “hard to get” increased to 45.8% from 43.5%, while those saying jobs are “plentiful” remained unchanged at 4.3%.

The drop in consumer confidence over the last two month is a bit worrying, especially when the bad mood of the consumers is directly spilling over in lower private consumption as visible from latest GDP data. The correlation between consumer confidence and private consumption is neither immediate nor very high. But it goes without saying that consumers need to be happy and private expenditures need to go up in the US as private consumption is close to 70% of US GDP and expected to return as the driver when effects from public stimulus begins to disappear during fall.



GDP for the second quarter of 2010 came out at 2.4%, which was a bit lower than expected. In the first quarter, real GDP increased 3.7%. The same goes for private consumption which also disappointed with a growth of just 1.6%, mainly spent on imported goods. US GDP has grown by 3.2% since end of Q2-2009 (end of recession). This is much slower than the recoveries following historic recessions in the period 1949-1981, but somewhat stronger than the latest jobless recoveries in 1991and 2001.

Employment has to improve in order to get back on a long term sustainable track of growth. US unemployment rate came out at 9.5% in June. This is the lowest level since July 2009 (update after 6.8 July release). One of the big questions is whether the labour market will be able to recover significantly in coming months to support the transition from, a stimulus/inventory-driven recovery to a demand-driven recovery.

The US housing market continues to struggle. Even though the sale of new homes rebounded in June, following the drop in May that was triggered by the termination of the tax rebate for buyers, the number of new home sales is close to a record low at 330,000. At the top of the market back in 2005, more than 1,300,000 new homes were sold at adjusted annual rate. The sale of new homes is important, as it remains a leading indicator for construction, which has dragged the US into an upturn in eight of the last nine upturns. New housing starts also extend their sleepwalking at 5-600,000 units at adjusted annual rate. Forecast is that activity will continue at this altitude for at least the next 6 months.

China:
China manufacturing PMI, as compiled by HSBC/Markit came in at 49.4 in July, the first sub-50 reading in 16 months. The reading translates into continued manufacturing production slowdown, reflecting the combined effect of credit tightening, property cooling measures and Beijing’s measures to cut capacity in energy-intensive sectors. However, there is no need to panic because this is just a slowdown, not a meltdown.

The Chinese economy is still expected to rely on continued investment into ongoing infrastructure projects, public housing construction and resilient private consumption to grow by around 9% in 2H 2010 and 2011.

The slowdown signalled by the HSBC/Markit PMI is being borne out by official Chinese PMI which came in at 51.2 in July as compared to 52.1 in June. Despite that, industrial production grew steady at an annual rate of 13.7% in June, compared with a 16.5% increase in May. The slowdown in manufacturing PMI was the first indicator that started to lose traction back in April. This slowdown was later confirmed as second quarter GDP growth came out at 10.3, putting an end to four quarters of increasing growth rates.

The lower PMI data is a clear signal that the top of the steaming hot economy has gone away, which was quite likely concurrent with the less expansive fiscal policy and the tightening of the monetary ditto. It is worthwhile to notice that the PMI in 2005-6 was hovering around the same level while industrial production continued at double-digit growth rates.

Outlook:
China’s Prime Minister, Wen Jiabao, said the decline was “primarily a result of active regulation and control. The communist government’s growth target this year is 8%. In the second half of 2010, keeping policies stable will be the underlying tone for the regulation and control of the economy. Furthermore, we will maintain the consistency and stability of policy and carry on adopting active fiscal policy and moderately relaxed monetary policy”.

This might well be the straw the shipping industry is looking for. Hoping that China has found its “new normal” and no further declines are to be expected. Whether this is actually going to be the case - only the future knows.

in Copenhagen, DK

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