Chinese Reflation Begins While the UK Toes the Line of a Recession
Economics news and commentary for February 10, 2023
China CPI & PPI
China's CPI grew 0.8% MoM and 2.1% YoY in January, up from 1.8% YoY in December. Thanks to China’s reopening, the economy is going to start to see some reflation in the first quarter of the year. So far since a slight near-term trough in November, the annual pace of inflation is up 0.5 ppts. The biggest jumps in prices were in food prices, up 2.8% MoM, and culture and entertainment prices, up 1.3% MoM, through a 9.3% MoM increase in travel prices. Both categories reflect the resurgence of consumer activity from the relaxation of COVID measures. What’s is also important to note is that energy prices fell on the month significantly as evidenced by gas prices falling -2.3% MoM which means that this increase in inflation was seen in the less volatile categories. In general, goods prices grew 0.7% MoM, and services prices grew 0.8% MoM. Both contributed to an increase in the annual growth of core CPI to 1.0% YoY which has been depressed over the past year. What’s the moral of the story? Demand for Chinese goods is set to increase inflation past the 2% threshold over the next few months as long as the current looser policies hold. China’s PMIs have pointed to both manufacturing and non-manufacturing firms anticipating increasing prices in the near term. This is necessary for its economy to return to previous levels of growth and to finally move past the three-year-long pandemic that had been such a burden on businesses and consumers.
While consumer prices saw some growth in January, that wasn’t the case for producer prices. China's PPI fell -0.4% MoM and -0.8 YoY in January, down from -0.7% YoY in December. While a big deflationary impulse came from energy, fuel and power prices fell -1.3% MoM, there was also a broader decline in other factory prices, though it was slight. Both commodity-producing firms and manufacturing firms saw an easing in prices of -0.7% MoM and -0.5% MoM respectively with both reporting declines on an annual basis as well. There was some rebound in the metals industries that had struggled so much over the last year. In particular, producer prices in the ferrous metal mining and dressing industry jumped 3.4% MoM while to a lesser extent producer prices in the non-ferrous metal mining and dressing industry increased 0.7% MoM. The reason that Chinese businesses haven’t seen the same inflationary impulse as consumer prices is struggling export orders. The Caixin China General Manufacturing PMI reported that “new export business contracted further amid reports of relatively weak global demand conditions.” This was the 6th month in a row of a decline in export orders. So while domestic demand has upside, the more general economic upside might be more limited due to recessions abroad because of the mismatch of China’s monetary policy and other developed economies’ monetary policy.
UK GDP
The UK's GDP growth was 0.0% QoQ in Q4 2022 as GDP fell -0.5% MoM in December. While top-line growth was flat, there was minor growth in consumption and more solid growth by UK businesses. Consumption edged up 0.1% QoQ, and gross fixed capital formation grew 1.5% QoQ. The services sector slowed to flat output on the quarter driven by falls in the education, and transport & storage sub-sectors. In the other sectors, production saw a slight drop of -0.2% MoM which was offset by a slight rebound in construction which was up 0.3% MoM. The slowdown in production was broad-based with 10 out of 13 subsectors contracting. The big movement in GDP growth was a negative contribution from net trade with exports down -1.0% QoQ and imports up 1.5% QoQ. On the year, growth was strong with GDP increasing by an estimated 4.0% in 2022, following the 7.6% increase in 2021 that followed the loosening of pandemic restrictions. We are set to see further declines in GDP in 2023, and the weak fourth-quarter results point to that. Consumption has slowed to a halt, thanks to inflation and a few interest rate hikes, which are both set to impact the economy further in the new year. Businesses will react to this as demand slows domestically and abroad and the cost of capital throttles new investment. The 4.8% QoQ increase in business investment in Q4 is an unsustainable level of growth that shouldn’t cross over to 2023.
Still to come…
10:00 am (EST) - US Consumer Sentiment
Morning Reading List
Other Data Releases Today
The UK's trade balance fell -£2.3 billion to -£23.6 billion as exports fell -0.8% MoM and imports increased 1.6% MoM. Energy imports continue to widen the trade deficit. Exports fell on a -7.4% MoM decrease in non-EU exports.
Italian industrial production grew 1.6% MoM and 0.1% YoY in December. Manufacturing production was up 2.0% YoY, and mining production was down -5.7% YoY. Over the last 3 months, production is down -0.9% QoQ.
Canada added 150,000 jobs in January, and the unemployment rate was flat at 5.0%. Total hours worked rose 0.8% MoM and were up 5.6% YoY. Average hourly wages grew 4.5% YoY, down from 4.8% YoY.
UK GDP
UK economy avoids technical recession - for now (ING) - A poor December GDP figure makes a first-quarter contraction in output look fairly inevitable. But these figures are undoubtedly noisy, and that means the Bank of England will be much more focused on wage and price data due next week.
Italy Industrial Production
Italian industrial production rebounded in December, beating expectations (ING) - Industry may have been less of a drag on fourth-quarter GDP growth than expected. Positive signals from confidence data in January warrant some optimism, but do not clear the way for a substantial short-term acceleration, given the uncertain external environment.
Bank of Japan
Bank of Japan to welcome Kazuo Ueda as its new governor (ING) - The new governor will likely lead the Bank of Japan to a gradual change in its policy stance.
US
US Economic Update – February 2023 (NAB) - January employment report very strong with a large bounce in non-farm employment. January services ISM also bounced back from its December fall; but other surveys still weak. We now expect, in addition to a March 25bp hike, that the Fed will also lift rates in May before pausing at a target range of 5.00-5.25%. We have also shifted out the timing of when we expect the Fed to start cutting rates from 2023 Q3 to Q4.
Research US: From soft landing to no landing? (Danske Bank) - From soft landing to no landing? The turnaround in macro momentum could prolong the need for tight monetary policy as labour markets remain too hot.
China
China Economic Update – February 2023 (NAB) - China’s sudden abandonment of its zero-COVID policies in December led the country into a disruptive transition period before what is likely to be an economic rebound across 2023. A faster-than-expected spread of the virus may reduce the length of the transition period, providing upside risk to our growth forecasts. That said, the strength of the rebound may depend on consumer confidence – particularly the willingness to spend the savings built up during zero-COVID.
China’s loan growth beats consensus but results are unbalanced (ING) - China's loan growth is usually strong in the first quarter of the year. But this time, we saw a historic jump, pointing to strong loan demand during the nascent economic recovery.
Canada
Taking Stock of Canada’s Housing Inventory (TD Bank) - During the current downturn in housing markets, Canadian new listings have dropped 19% on a peak-to-trough basis, with broad-based declines across provinces. This decline in supply has saved home prices from an even steeper drop. After some near-term weakness, our forecast anticipates new listings climbing through much of 2023 and in 2024. However, rising demand should keep markets balanced and underpin positive growth in home prices, particularly in the second half.
Latin America
Crosswinds for Latin America and Colombia (BBVA) - The Latin American economy faces crosswinds in a scenario of disequilibrium, in line with international dynamics, where the main economic variables are still adjusting after the disruptive events of the most recent years.
Africa
Ghana's economic downturn moderates amid debt deal (S&P Global) - The economic downturn in Ghana's private sector softened at the start of 2023 as inflationary pressures showed signs of easing. This, allied with an agreement with the IMF and a deal on a debt exchange programme, provides hope that the economy can move into recovery mode in the coming months. Indeed, companies were at their most optimistic for a year in January.
Taiwan
Taiwan economy hit by slump in exports (S&P Global) - Taiwan's export-driven economy has been hit by slumping exports, resulting in GDP contracting by 0.9% year-on-year (y/y) in the fourth quarter of 2022. A key factor driving the export slowdown has been weak demand from mainland China, due to the impact of COVID-19 restrictions during 2022. With the US and European Union (EU) also forecast to experience weak growth in 2023, Taiwan's economic outlook is for some moderation in the pace of economic growth in the near-term.
Global Growth
Sector PMI present mixed picture for global growth at the start of 2023 (S&P Global) - Purchasing Managers' Index (PMI) from S&P Global provide a unique insight into worldwide economic trends, allowing the analysis of business activity by detailed sector in the world's principal regions. The broad picture presented by the latest S&P Global Sector PMI is one of mixed conditions between the sectors, with growth noted in only a handful of industries, led by consumer services, while others remained in contraction, with the steepest decline seen in financial services.
Real Estate
Housing Affordability Hits Record Low but Turning Point Lies Ahead (NAHB) - Mirroring a steep rise in mortgage rates that began in the early part of 2022 and coupled with ongoing building material supply chain bottlenecks that increased construction costs, housing affordability posted three consecutive quarterly declines in 2022 and now stands at its lowest level since the National Association of Home Builders (NAHB) began tracking it on a consistent basis in 2012.
Banking
Banking risk monthly outlook: February 2023 (S&P Global) - Our banking risk experts provide insight into events impacting the financial sector in emerging markets in February.
Markets
The equity market in four charts (Saxo Bank) - The rally in global equities has pushed equity valuations above their long-term average increasing the risk for equities should interest rates increase due to stickier inflation in the coming months. Retail investors are also indicating in surveys that they are the most bullish since November 2021 and the number of S&P 500 stocks above their 200-day moving average is at 73.5% suggesting for room for the rally to extend.
Rates Spark: Putting disinflation to the test (ING) - The US disinflation narrative will have to pass a crucial test over the coming days, starting with today's University of Michigan inflation expectations release. However, key will be next Tuesday's CPI data. In the eurozone the European Central Bank balance sheet is featuring in officials' communication again of late, but for now with limited effect.
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