China: Soft Landing or Rapid Resurgence?

China: Soft Landing or Rapid Resurgence?

China's economy showed renewed strength; Eurozone manufacturing weakened; U.S. industrial production fell slightly as companies began to work down inventory levels.


"The complex competition in technology and strategic influence [between the U.S. and China]... is not something that will be resolved overnight."
Singapore Finance Minister Heng Swee Keat

China: Soft landing or rapid resurgence?

Official figures for growth in Q1 showed strength. GDP came in at a 6.4% annualized rate and 6.4% year-on-year, besting expectations. Figures were boosted by March industrial production growth of 8.5% year-on-year, well above forecasts. Retail sales for March showed 8.7% year-on-year growth, also ahead of expectations.

Analysts credited tax cuts and renewed boosts to local government infrastructure spending. Consumption drove more than 65% of the activity during Q1, confirming assessments by consumer-facing companies that demand from individuals continued strong. Spokesman Mao Shengyong of China's National Bureau of Statistics described the data as "relatively stellar", especially against a backdrop of weak international trade and other adverse conditions.  Also contributing to positive sentiment: comments by some U.S. officials of rapid progress in trade negotiations between China and the U.S.
 

Eurozone: Manufacturing slowdown

April's manufacturing PMI (Purchasing Manager Index) figure for the region signaled contraction for the third consecutive month, coming in at a worse-then-expected 47.8 (PMI figures above 50 signify expansion; below 50, contraction).

German manufacturing was at the center of the decline, with its PMI at a below-consensus 44.5, the fourth consecutive month of contraction. Germany's economy ministry had already cut its own forecast for 2019's full-year overall growth to 0.5%, the most recent downgrade of its original projection of 2.1% a year ago. This revision would make Germany the Eurozone's second worst performing economy after Italy for the full year 2019. German Economy Minister Peter Altmaier commented that the "current weak phase in Germany's economy must be a wake-up call"; and yet, Steffen Seibert, the Chancellor's spokesman, denied the need for a growth-boosting package of plans.

Many observers blame Eurozone sluggishness on tariffs, both current and future; the International Monetary Fund (IMF) cut its outlook for global growth on indications higher tariffs are impacting global trade.
 

U.S. economy: Stockpiling strength

Industrial production for March disappointed, falling by ‑0.1% vs. February's 0.1% growth. Capacity utilization also fell short of expectations at 78.8% vs. an expected 79.2%. Part of the reason for disappointment could be due to inventory accumulation during previous quarters. That would lower the need for production as excess inventory gets drawn down, especially if sales volume softens.

U.S. government figures indicate that inventory accumulation added an average 1.2 percentage points to overall economic growth in Q3 and Q4 2018. Examples include autos, where the six-month average of dealer inventory of cars and trucks stood at 75 days of sales, the highest level since 2009. Furniture and clothing manufacturers and retailers face similar challenges.  The National Federation of Independent Businesses (NFIB) reported in its otherwise upbeat March report that for the first time since December 2017, small business owners planned to reduce rather than increase inventories. Some reports suggest that the inventory buildup was intended to head off the impact of trade disputes between the U.S. and its partners. If so, a decisive resolution of the trade conflict between the U.S. and China could take slightly longer to ripple through the economy.

Inventory buildup also means that the impact of Friday's stronger-than-expected March vs. February retail sales growth of 0.9%, ex autos and gasoline, could have less impact on overall growth than if those sales were more closely matched by improvements in manufacturing and imports – something less likely if there’s significant inventory already on hand.

 


All prices Source: Bloomberg, as of April 18, 2019, unless specified otherwise.
 

Definitions:

Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms.

The National Federation of Independent Business (NFIB) is a US small business advocacy association, representing 350,000 small and independent business owners.

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