Weak trade data suggest China is in the midst of a slowdown in domestic demand, but do not point to a “hard landing” scenario. Exports have flattened out in recent years, while much of the decline in imports appears to be a price effect rather than a sharp decline in import volumes.
In the United States, a typical inventory correction is taking place. Companies set up for strong demand at the end of last year, but have faced weaker than expected sales. The need for an inventory drawdown reduces GDP growth in 2H, but will likely prove to be a temporary drag for the overall economy.
In Europe, the announcement of QE2 looks more likely to be postponed from October to December. Recent data would be consistent with an October move, but it may take a bit longer to form a consensus on the Council. Waiting until December could increase pressure on the ECB to extend and expand QE.
China’s slowdown has hurt the rest of Asia via weaker exports and lower commodity prices. China’s slowdown could also hurt banks exposed to commodity firms with heavy dollar debt. Singapore, India, and Malaysia have the largest commodity loans as a percentage of GDP; Thailand and Indonesia as percentage of corporate debt.
In Japan consumer spending is likely to rebound as the positive impact on purchasing power from the decline in energy prices has started to outweigh the negative impact from the increase in food prices and high-income consumers’ selective spending should rebound as the pullback from the last-minute spending before VAT hike wanes.
Discussions at our Great Debates Conference in Lima, Peru, centered on China and the Fed. Consensus at the conference seemed to be that there would be no crisis or hard landing in China, but the impact of its slowdown and rebalancing on LatAm remains uncertain. On the Fed, the lack of inflationary pressures will push hikes into next year despite the US leading growth dynamics in advanced economies.
In the UK, strong August jobs gains offset some of the gloom. Little spare capacity remains, so wage growth has returned. The question for the BoE is whether growth/inflationary turbulence from abroad turns into something worse. The bank will be in wait and see mode for a while.
Business and consumer sentiment are not what they used to be in Australia as well. The exceptionally strong economic conditions brought by the resources price cycle are behind us. Nonetheless, current levels of business confidence and improving conditions should be enough to support sub-trend growth and the RBA on the side-line.
