This week Strictly Boardroom seeks the help of two friendly economists in explaining recent weakness on markets. Their answer was not surprising: “It’s the economy, doofus!”
Here’s how the latest economic data play out across selected world economies – starting with the driver of Australian commodity fortunes, China – and thence to the recovery in the US plus the economic latest on Russia, India and Indonesia. On balance recent numbers are none too flash – but silver economic linings exist, nonetheless.
Recent data releases suggest the Chinese economy performed much worse than expected during August as investment demand decelerated. Such data dented short-term growth expectations but the government is signaling that it is comfortable with lower growth rates.
Industrial production was a particular surprise with growth of 6.9% year-on-year compared to the consensus expectation for 8.8% and an increase of 9% in July. Investment demand – led by real estate – has contributed to recent weakness with fixed asset investment decelerating further in August to 13.3% from 15.6% in July and is now expanding at is slowest rate in real terms for over a decade.
Real estate investment growth in China dropped to a post-financial crisis low of 9.9%. While these data are concerning and suggest the risks of a weaker-than-expected outcome for the economy in the short-term have increased, recent statements by Premier Li indicate that a knee-jerk policy response is highly unlikely. This is significant and, arguably, a positive as it reduces the risk of a significant economic downturn in the medium-term.
Industry in the United States failed to manufacture growth of its own in August but the country is contributing to industrial production growth in Mexico. That is, manufacturing output surprised on the downside in August, falling for the first time since January by 0.4% month-on-month to drag the headline industrial production index down by 0.1%.
Manufacturing’s fall owed much to a 7.6% fall in the production of automobiles and their parts after jumping by 9.3% in July as autos producers forewent their usual summer shutdowns. Census Bureau data however indicates robust growth in automobile sales of 1.5% month-on-month in August, the production level’s downward-change in gears does not seem to be indicative of demand in the market.
South of the border, improving US demand offered some support to Mexican industry. Latin America's second biggest economy saw manufacturing output (which accounts for almost 70% of an export market largely serving the US), increase by 1.2% month-on-month in July (the most recently available data). Mexico’s economy has stalled in response to higher taxes this year but the outlook remains promising as the government plans to invest tax revenues.
Russian industrial production fell in August by 0.7% month to month, reversing last month's 0.6% uplift to leave the annualized industrial production growth rate at just 0.3%, the worst outcome since last December.
With sanctions recently extended and fighting continuing in eastern Ukraine, the outlook for the coming months is bleak. Under pressure since early 2013 as high growth in labour costs has damaged competitiveness, metal-intensive industries such as the transport equipment and machinery sectors have suffered as a result.
CRU expects to see Russian car production contract by 10% this year and industry in general to come under further pressure in the remainder of 2014 as sanctions act to increase borrowing costs constraining investment spending growth.
In India, July’s industrial production suffered in part by way of comparison to a strong July in 2013 and manufacturing – which accounts for some 75% of the headline index – declined by 1% year-on-year following several months of decent growth.
In Indonesia, July’s dip in industrial output contrasts with the state of the automobile sector. Light vehicle production has grown by almost 20% over the same period last year according to data from LMC Automotive. CRU believes July’s data are a temporary lull from which both countries will rebound in coming months as business confidence improves. CRU foresee growth in industrial production of 3.1% this year and 5.3% in 2015 for India and 4.3% (2014) and 6.3% (2015) for Indonesia.
Good hunting.
Allan Trench is professor (value and risk) at the Centre for Exploration Targeting, University of Western Australia, professor of energy and mineral economics at Curtin University Graduate School of Business, a non-executive director to several resources sector companies – and the Perth representative for CRU Strategies, a division of independent metals and mining advisory CRU Group (allan.trench@crugroup.com).
Jonathan Humphrey is a member of the economics team at CRU Group, based in London jonathan.humphrey@crugroup.com
Grant Colquhoun is Group economist at CRU Group, London. grant.colquhoun@crugroup.com The economic snapshot is an extract adapted from within the October monthly economic report issued to CRU clients.
