Chinese Annual GDP Growth Falls Short of 3%, Canada's CPI Eases on Lower Gas Prices
Economic news and commentary for January 17, 2023
China GDP, Retail Sales & Industrial Production
China's GDP was flat on a quarterly basis and up 2.9% YoY in Q4 2022. Growth ends on a weak note in China as effect of COVID restrictions leave their lasting impact. The primary industry grew 4.1% YoY, the secondary industry grew 3.8% YoY, and the tertiary industry grew 2.3% YoY. Consumer activity was significantly impaired by the restrictions despite the increase in incomes. China reports that real disposable income grew 2.9% YoY, but real consumption expenditure fell -0.2% YoY. Trade grew in 2022 as the relaxation of some supply constraints helped China’s export business. However, economic weakness weighed on imports which led to a large trade surplus. Total import and export trade volume grew 7.7% YoY with imports up 4.3% YoY and exports up 10.5% YoY. Overall, 2022 was a rocky year for China as the country battled a real estate crisis while consumer and business activity were severely impacted by the government’s strict zero-COVID policies. The outlook for 2023 should be improved with these policies lifted, but now its economy will have to worry about weakness abroad as a threat to its growth.
Chinese retail sales fell -0.1% MoM and -1.8% YoY in December, up from -5.9% YoY in November. The weakness in consumption continued in the last month of the year, but it seems that the worst is behind us. Food sales were strong, up 10.5% YoY, but many other goods categories saw steep annual declines. Daily necessities (-9.2% YoY) and household appliances (-13.1% YoY) sales are both examples of significantly lower spending in key retail segments. The real estate crisis has also continued to hamper spending on building and decoration materials which was down -8.9% YoY.
The pain was also felt on the business side. Chinese industrial production grew just 0.1% MoM and 1.3% YoY in December. This annual decline has fallen consistently since September. Manufacturing production was up a dismal 0.2% MoM, dragged down by auto production falling -5.9% YoY, and general equipment manufacturing falling -3.4% YoY. The effects of Beijing’s new intentions to focus on high tech manufacturing have provided some support. The general high-tech manufacturing segment improved 2.8% YoY, an improved figure over the general manufacturing number. Within that, electrical machinery was also strong, up 10.8% YoY.
Canada CPI
Canada's CPI fell -0.6% MoM but was up 6.3% YoY in December, down from 6.8% YoY in November. The largest monthly decline since April 2020 means more easing in annual inflation. The drop was assisted by the largest monthly decline in gas prices since the same month, April 2020. Consumers paid -13.1% MoM less at the pump in December as crude oil prices tumbled at the end of 2022. The led to the energy CPI subcomponent to fall -7.9% MoM to an annual pace of just 7.3% YoY. Food inflation now tops that rate, up 10.1% YoY, as consistent monthly gains continue. Outside of food, goods prices were on the decline, falling -1.7% MoM. Both durables and non-durables saw pricing pressures ease as the consumption of goods softened. On the other hand, services prices rose 0.3% MoM, a moderate increase to put the annual pace at 5.6% YoY. The differential between goods and services inflation is now just 1.3 ppt, a new low since the start of surging inflation at the beginning of 2022. Annual core CPI growth sits at 5.3% YoY where it has stalled since June 2022. This will be troubling for the Bank of Canada as it considers what to do next with its policy rates. The deflation that it is seeing now is a result of shelter and goods prices easing, but services prices are proving to be stickier, likely as a result of the tight labor market keeping wage growth high. With that being said, the Bank of Canada should think that it has more work to do, and we should see some rate hikes in the beginning of 2023.
Germany CPI
German CPI fell -0.8% MoM in December but was up 8.6% YoY, down from 10.0% YoY in November. For the full year of 2022, inflation was 7.9% YoY. Food and energy inflation remain at elevated levels to end the year, food CPI up 19.8% YoY, and energy CPI up 24.4% YoY (despite falling -11.6% MoM). This left goods prices up 13.9% YoY. Services prices were up 3.9% YoY with the largest category, restaurant and accommodation services, up 9.6% YoY. Reopening effects will continue to keep services CPI high in 2023 as goods prices cool. In the end, core inflation closes the year out at 5.2% YoY.
UK Employment
The UK added 28,000 jobs in November, and the unemployment rate increased 0.2 ppts to 3.7% in the 3 months to November. Despite adding jobs, the unemployment rate saw a slight increase as a result of labor force participation ticking higher. The economic inactivity rate edged down -0.1 ppts to 21.5% but was still higher by 1.3 ppts from February 2020. Weaker economic conditions have led to a slight decline in labor demand. Job vacancies fell -75,000 in the three months to November, but the level remained elevated at 1.2 million. As a result, nominal wage growth has been sticky above 6% YoY. Even if a recession comes in the UK, there will likely not be a substantial increase in joblessness. Businesses are still indicating that labor shortages are increasingly and obstacle to operation, and that issue does not appear to be clearing up anytime soon. In one way, this is good for UK consumers who will not have to be in fear of mass layoffs in a recession. In another way, this could be troubling for the Bank of England which is looking to reduce wage inflation from its current rate.
Still to come…
6:50 pm (EST) - Japan Machinery Orders
9:30 pm - Bank of Japan Announcement
Morning Reading List
Other Data Releases Today
Chinese national fixed investment was 5.1% YoY in Dec, down from 5.3 YoY in Nov. Private investment was up just 0.9% YoY while state investment was up 10.1% YoY. Electrical machinery investment has surged, 42.6% YoY.
China's new home prices in 1st tier cities grew 2.2% YoY in Dec. Prices in 2nd tier cities were up just 0.6% YoY, and 3rd tier cities were down -3.9% YoY.
Italian CPI was confirmed at 0.3% MoM and 11.6% YoY in December, down from 11.8% YoY in November. CPI grew 11.9% YoY for the full year of 2022.
The ZEW Indicator of Economic Sentiment for Germany jumped 40.2 pts to 16.9 in Jan. This is the first positive reading since February 2022. The Economic Situation index improved just 2.8 pts to -58.6.
Canada housing starts fell -5% MoM to 248,625 in December. Multi-unit urban starts fell -4% MoM, and single-family urban starts fell -11% MoM.
The Empire State Manufacturing Survey general business index fell -22 pts to -32.9 in January. New orders and shipments declined substantially, and Input price increases slowed considerably.
Consumer Sentiment
More Relief than Swagger in Sentiment Surge (Wells Fargo) - The 64.6 reading for consumer sentiment in January marks the top print in the past year. Relief on the inflation front and wage growth are lifting spirits, but still-sour buying conditions suggest the good vibes in this report may not translate into a spending surge.
Inflation
“Transitory” wasn’t ALL wrong (CIBC) - A word that was seen as so ill-judged that it’s been banished from America’s economic lexicon won’t now make a comeback, but perhaps it should. Those who labelled the inflation upsurge of 2021 and early 2022 as “transitory” ended up with egg on their faces. But the CPI’s behaviour in recent months suggests that at least some of what we’ve gone through on the inflation front was indeed befitting of that label, if we waited long enough.
Post-COVID Inflation Dynamics: Higher for Longer (Cleveland Fed) - In the December 2022 Summary of Economic Projections (SEP), the median projection for four-quarter core PCE inflation in the fourth quarter of 2025 is 2.1 percent. This same SEP has unemployment rising by nine-tenths, to 4.6 percent, by the end of 2023. We assess the plausibility of this projection using a specific nonlinear model that embeds an empirically successful nonlinear Phillips curve specification into a structural model, identifying it via an underutilized data-dependent method.
Concrete prices won’t fall before spring despite lower energy prices (ING) - The prices of many building materials have been decreasing lately. However, the prices of concrete, cement and bricks are still creeping up. Despite the decrease in energy prices, we don’t expect lower prices for these energy-intensive building materials before the spring.
How Much Have Record Corporate Profits Contributed to Recent Inflation? (Kansas City Fed) - Although higher corporate profits have received attention recently, profits and inflation do not have a direct accounting relationship. However, inflation is directly affected by growth in the markup—the ratio between the price a firm charges and the firm’s current marginal cost of production. Inflation in a firm’s prices is therefore the sum of the growth in the marginal cost of production and the growth in the markup.
War Not Yet Won on Inflation (Wells Fargo) - The December Consumer Price Index data was the most significant macroeconomic development of the week and showed modest deflation to finish 2022. We now expect the Fed to hike the federal funds rate by just 25 bps at its next policy meeting on February 1, but a slower pace of tightening does not necessarily mean less.
Inflation Monitor for January 16 (BMO) - U.S. inflation continued to slow in December, providing more indication that price pressures have peaked. This will likely lead the Fed to further slow the pace of rate hikes.
US
Rocky Road: Dessert or Disaster Ahead? (Wells Fargo) - The U.S. economy has continued to expand at a solid pace as the calendar turns to 2023. Nonfarm payrolls increased by 223K in December, and Q4 real GDP growth is tracking at around a 3% annualized pace. Slower inflation over the past few months, led by falling energy prices and normalizing prices for pandemic-hit sectors such as autos and airfares, has likely played a role in sustaining the momentum of the economy.
China
China: Big beat in December activity data means growth could rebound in 2023 (ING) - China's retail sales data was much stronger than expected in December even though this strong growth came mainly from food and medicines. The message is clear. If retail sales in 4Q22 can be this good, then retail sales in 1Q23 should be even better. We are revising our GDP forecast higher.
China reopening boosts copper outlook (ING) - Copper jumped above $9,000/t for the first time since June at the beginning of 2023 on optimism about China's economy, after Beijing abandoned its zero-Covid policy. We believe there is more upside for copper prices as demand in China picks up after the Lunar New Year holiday at the end of this month.
China reopening rally to drive up iron ore prices (ING) - Iron ore has rallied above $120/t at the start of 2023, rising by more than 50% from the lows of just under $80/t in early November 2022, with China driving prices higher. We have increased our price forecast for 2023 reflecting continued China reopening optimism and likely further stimulus measures.
China slowed in late 2022, but less than expected (ABN AMRO) - China Macro: Q4 GDP data better than expected. December data bring retail sales suprise.
UK
UK jobs market remains resilient despite incoming recession (ING) - While the jobs market is a lagging indicator of economic strength, the resilience of both vacancy and redundancy numbers suggest the impact of the forthcoming recession on the jobs market will be more modest than in some past recessions.
Canada
Business and consumer optimism weaken in Q4 2022 (TD Bank) - The Bank of Canada Business Outlook Survey (BOS) reported a further drop in Canadian business sentiment in the fourth quarter of 2022. The BOS indicator, a statistical summary of survey results, was 0.07 in 2022Q4, down from 1.74 in 2022Q3. That marks the lowest reading since Q3 2020.
All’s Well that Starts Well (BMO) - Our official call is in the shallow recession camp, and we are at the low end of consensus calling for zero GDP growth in both Canada and the U.S. this year (the average call is now 0.4% for Canada, after around 3.5% last year).
Canadian home sales increased for the second time in three months in December (TD Bank) - December's increase in sales (and only mild drop in prices) comes despite an early-December Bank of Canada hike and signals that a bottom in the housing market may be forming.
Tighter Policy Weighing on Outlook (BMO) - The BoC’s aggressive rate hikes through 2022 have clearly weighed on economic sentiment among both businesses and consumers. However, still-elevated inflation expectations will keep the Bank on alert. This survey is consistent with our call of a 25 bp rate hike at next week’s meeting, after which we anticipate the Bank will hold interest rates steady through the remainder of 2023.
Canadian Housing Market — Quiet Time (BMO) - Housing activity tends to be at its quietest in December and January in any event, so it's unwise to read too much into trends around the turn of the year. But this past December was particularly slow, for both sales and—importantly—new listings. The latter has helped slightly firm what had been a soggy market balance, and reinforces the point that there is little forced selling underway, helping provide some support for prices.
Australia
Consumer sentiment rises for a second consecutive month (Westpac) - The Westpac Melbourne Institute Consumer Sentiment Index increased by 5%, from 80.3 in December to 84.3 in January. This is the largest increase in the Index since April 2021, and prior to that, since October 2020 when consumers were responding to positive news around the pandemic.
Brazil
"Brazil Is Back" In The Headlines (Northern Trust) - Tensions have been running high in Brazil, in both the streets and the financial markets. Brazil had its own “January 6 moment” last Sunday, as protestors supporting former president Bolsonaro invaded and ransacked the presidential palace, the Supreme Court and the offices of Congress. Financial markets tanked over fears of more interventionist and less fiscally responsible policies pledged by the leftist leadership. The Brazilian real dropped 3.6% against the dollar, and the Bovespa Index fell 5.3% in the first two days of the new regime.
Rates
Limitations of the Yield Curve (Northern Trust) - The downward-sloping curve offers no further information about the future contraction. Past inversions did not signal an immediate recession; gaps between inversions and recessions measure in the months or even years. The sustained inversion beginning in July 2006 turned positive after a year, and the Global Financial Crisis did not take hold until 2008.
Just Because the Fed Is Doing It .... (BMO) - Now that the Fed is gaining reassurance that inflation is coming down, attention is turning to other central banks. Will they or won’t they follow the Fed’s lead?
Employment
Content in Retirement (Northern Trust) - In the present day, economists are hoping that more people will come out of retirement. Labor markets remain very tight, and the premature departure of more experienced workers is one of the main reasons why. Unfortunately, it is appearing increasingly unlikely that seniors will return to work, leaving a big gap between demand and supply in the job market.
FX
EUR/USD: We’re giving our euro dollar forecast a factory reset (ING) - A more benign environment than we were expecting means we're revising our 2023-2024 EUR/USD profile substantially higher.
Construction
Material Shortages Ease, With Notable Exceptions (NAHB) - NAHB has been tracking shortages of building materials and products since the 1990s through special questions on the survey for the NAHB/Wells Fargo Housing Market Index (HMI), most recently in October of 2022. At that time, over 80 percent of single-family builders reported either a serious or some shortage of three categories of building products: appliances (88 percent), transformers (86 percent) and windows & doors (83 percent).
Subscribe to receive Econ Mornings every weekday at 9 am. More economic and finance content on Twitter, Reddit, and my website.