Chinese GDP dips towards 8%

Chinese year-on-year (y-o-y) GDP growth slowed to 8.1% in Q1. The worsening state of the country’s residential housing market was the major source of weakness. Residential and commercial property sales fell by 14.6% y-o-y during the quarter, while commercial vehicle sales fell 10.8%, indicating declining business confidence. Growth of 8% is widely regarded as the threshold at which China begins to struggle to create sufficient new jobs for labour-force entrants. 8% is therefore a politically significant threshold that, if crossed, is likely to trigger broader fiscal and monetary stimulus efforts.

US consumers emerging from hibernation?

Despite the unemployment rate stable at about 8% and subdued real wages, there is some evidence that the US consumer is increasingly weary of austerity. Retail sales are buoyant, with the automotive sector particularly strong. Meanwhile, consumer credit has risen significantly, mainly driven by nonrevolving loans, those contracted to buy houses and cars. Indeed new housing permits hit their highest level since October 2008 in February and March. However, the residential housing market is still weak and industrial production remains some way off its pre-recession peak.

Spanish banking system now main threat to Eurozone stability

The structured default has put Greece out of the limelight, at least for the moment. Attention has been diverted to the weakness of the Spanish banking system, which has become the main threat to Eurozone stability. With Spain’s rate of unemployment rising to 22.9% during Q4 2011, non-performing loans (more than three months overdue) held by Spanish banks have hit a 17-year high, rising 27.7% y-o-y in February. With yields on Spanish ten-year sovereign debt rising above 6%, a level that is seen as unsustainable in the long run, a further easing of Eurozone monetary policy may be on the cards.

US industrial output continues its slow recovery...

For the second consecutive month, March industrial production in the USA was unchanged in month-on-month (m-o-m) terms. It increased at an annual rate of 5.4% during the first quarter, with automotive output particularly strong. Total industrial production in March stood at 96.6% of its 2007 average. The manufacturing purchasing managers’ index remains robust, with the headline reading increasing by a point, from 52.4 to 53.4 between February and March. Customer inventories tightened (falling from 46 to 44.5) and the backlog of orders increased (from 52 to 52.5), but export demand weakened substantially (from 59.5 to 54).

...signalling stronger domestic demand...

Domestic consumer demand is clearly rebounding: The automotive industry’s selling rate for Q1 was 14.5 million units, its highest level since 2008, while seasonally adjusted retail sales grew by 1% in February and 0.8% in March. In y-o-y terms, retail sales rose by 6.4% during Q1. However, with household earnings still weak, this growth may be difficult to sustain: the median weekly earnings of full-time wage and salary workers in the US stood at US$769 during the first quarter of 2012, up 1.9% y-o-y. However, the annual rate of inflation stood at 2.8% over the same period. Moreover, the Case-Schiller 20-city composite housing index continues to fall, decreasing by 3.9% y-o-y during January.

Dip in Japanese output likely to be temporary

Having increased by 1.9% m-o-m during January, Japanese industrial production unexpectedly declined by 1.2% in February. However, this is probably a blip: Japan’s PMI increased from 50.5 to 51.1 between February and March, while it recorded its first trade surplus in five months during March.

...as BoJ signals monetary easing

Meanwhile, the Bank of Japan (BoJ) caused something of a surprise in March by easing monetary policy and increasing its target for the annual rate of inflation to 1%, suggesting increased vigour in its efforts to beat deflation. Excluding fresh food, consumer prices unexpectedly rose by 0.1% y-o-y during February, their first gain in five months.

Germany and the Eurozone flirt with recession

German industrial output declined by 1.3% m-o-m in February, after severe winter weather hit construction activity (down 17.1% m-o-m). Manufacturing output fell 0.4% m-o-m. Meanwhile, a surge in energy output was partly responsible for a 0.5% m-o-m increase in Eurozone industrial output during the same month. Capital goods production rose 0.7% compared to January 2012 but the output of both intermediate and consumer goods fell. However, compared to the month of February 2011, output fell 1.8%, raising the risk of the region slipping into recession during Q1.

Inflation edges upwards in the UK

After five months of uninterrupted decline, the consumer price index rose from 3.4% to 3.5% between February and March. This has raised concerns that the Bank of England forecast of inflation falling below 2% by the end of the year will not be met. Manufacturing output in the UK fell by 1% m-o-m in February, its biggest decrease for ten months, underlining fears that the UK economy will struggle to return to growth during Q1. On a brighter note, like-for-like retail sales rose by 1.3% y-o-y in March, boosted by unseasonably warm weather. Following m-o-m decreases of 0.3% during both December and January, French spending on consumer goods rebounded strongly during February, increasing by 3%. As in much of the rest of the Eurozone outside of Germany, rising unemployment (up from 10.7% in January to 10.8% in February for the whole euro area ) is holding down both wages and consumer sentiment, while higher taxes and more expensive food and energy are undermining purchasing power.

Emerging Economies

Chinese GDP growth slumps as housing market weighs on commodity demand

The annual rate of GDP growth in China slowed from 8.9% to 8.1% between the fourth quarter of 2011 and the first quarter of 2012. As the market deflates, decreasing investment in construction is likely to continue to drag down growth for much of this year (real estate investment accounted for 13% of Chinese GDP in 2011). In March, residential real estate investment grew at its slowest annual rate since the middle of 2009. Consumers took up some of the slack, with household and government consumption expenditure accounting for 76% of GDP growth during Q1. Meanwhile, Chinese electricity consumption grew by a relatively meagre 7% y-o-y during March, with the consumption of electricity by heavy industry increasing by just 1.6%, as the housing slump helped to depress production of such primary products as steel, aluminium and cement.

...but monetary policy easing boosts bank lending

Meanwhile, new bank lending during March hit RMB1 trillion for the first time since January 2011 as part of efforts to boost economic growth. The monetary easing is reflected in the acceleration of the annual rate of consumer price inflation from 3.2% to 3.6% between February and March, with food price inflation contributing the most, with its rise from 6.2% to 7.5% over the same period.

Underwhelming production growth in India...

Weak export demand and monetary tightening at home resulted in Indian industrial output rising by a less-than-expected 4.1% y-o-y during February. Production in mining and manufacturing grew by 2.1% and 4% respectively, while electricity output increased by 8%. January’s growth rate was revised downwards from 6.8% to 1.1% following the discovery of an error in the calculations. With growth sluggish, the Reserve Bank of India signalled a major turnaround in monetary policy in mid April, when it reduced its repo rate by 50 basis points, to 8%. This in turn risks reigniting inflation. Wholesale price inflation has been stable in the first three months of 2012, at around 6.9%.

Brazil slashes interest rates to reverse currency appreciation

In mid April, Brazil’s central bank also slashed its benchmark interest rate by 75 basis points, to 9%. This was aimed at keeping the value of the Brazilian real low in order to maintain competitiveness. As recently as August 2011, the benchmark interest rate stood at 12.5%. Having contracted by 1.5% during January, industrial output grew by 1.3% m-o-m in February. The elimination of a 20% payroll tax, which will come into effect for certain industries in July, will act as a further spur to growth during the second half of the year. A boost to growth, however, does not appear likely in the short term. For the first time in 6 months, in fact, retail sales fell by 0.5% m-o-m during February. Additionally, there are concerns that the loosening of monetary policy will fuel inflation, which fell to 5.2% y-o-y in March.

Disconnect between output and consumption in Russia...

Growth in Russian industrial output decelerated sharply during March, to just 2% y-o-y. Automotive output did better than the average industry and grew by 18.6% y-o-y during Q1, while the output of steel pipes fell by 15.5%. In contrast, Russian retail sales grew by a robust 7.3% during the same month, down from the even stronger 7.8% in February. The divergence between high and rising domestic consumption and more sluggish industrial production is resulting in a drive in imports led by the booming consumer demand, while domestic production remains overly dependent on commodities.

...while the low inflation spell is set to end

Meanwhile, inflationary pressure remains subdued, with consumer prices rising at an annual rate of 3.7% in March, unchanged from the previous month, a record post-Soviet low. However, this rate is likely to increase over the coming months, as positive base-year effects are worked out of the system and hikes in energy prices, delayed due to the presidential election, are belatedly implemented.

Click here to view MBR's Global Economic Indicators