Weekly Market Update – 22 July 2019

CHINA ECONOMIC OUTPUT

More jam today, less tomorrow

In its preliminary estimate, the National Bureau of Statistics of China calculates a 1.6% increase in gross domestic product (GDP) during the second quarter of the year. The equivalent year-on-year rate comes in at 6.2%. That’s an increase which is shy of expectations for 6.3% and which falls short of the 6.4% increase in the prior period. Indeed, the most recent estimate represents the slowest pace of economic growth in a record that stretches back 27 years.

Looking ahead, it seems unlikely that the official measure of output growth will miss the 6.0-6.5% target for the calendar year but a credible estimate will more likely trend toward the lower limit of that range. And then, perhaps only if further steps are taken to boost activity.

Additional stimulus – even more stimulus that is – may come in the form of lower interest rates, lower reserve requirements, relaxed local-government borrowing restrictions, eased limits on home sales and/or purchase subsidies for big-ticket consumer items. The net effect, in varying degrees, will be to encourage greater investment in the first instance and, with luck, additional consumption in the second.

But support for high rates of growth is not without consequences.
Yet more debt will be added to a stockpile which, according to the Institute for International Finance, now amounts to a whopping 304% of GDP. At the same time, further support for state-run heavy industry and likely downward pressure on the yuan will not be welcomed by
trade negotiators over in the US.

UK INFLATION

Spot on

The Office for National Statistics (ONS) calculates a headline increase in the Consumer Price Index of 2.0% in the 12-months to the end of June – exactly in line with the Bank of England’s target rate.

Downward pricing pressure was apparent in the cost of motor fuels (crude oil is down 11.4% in sterling terms compared with this time last year), other fuels and accommodation services while upward pressure persisted in prices for clothing and food.

Meanwhile, core inflation rose 1.8% and the older Retail Price Index is up 2.9%.

UK EMPLOYMENT SITUATION

Still good

There’s little doubt that the British economy is softening. We reckon output growth slowed to a standstill during the second quarter of this year. The labour market, though, remains firm by comparison. The ONS counts the number of unemployed at around 3.8% of the
economically active population – a rate not bettered since 1974.

Happier still, the most recent data headlines a faster increase in total pay. Nominal earnings are up 3.4% compared with this time last year. Real wages are up 1.7% compared with an average real-terms yearly decline of 0.1% over the last 10 years or so.