China's GDP rebounds in Q2

Chris Scicluna
Emily Nicol

Overview:
Despite an upside surprise from China’s GDP data (see below), Chinese stocks had a horror show today, with the CSI300 closing down 4.9%, the worst showing since the height of the country’s pandemic in early February. So, unsurprisingly, other major bourses in the region saw losses too, although these were rather modest in comparison, e.g. with the Topix down just 0.7%. But most European equity markets have opened about ½% lower too with S&P500 futures lower too.

In bond markets, Gilts are a touch firmer (10Y yields down a little more than 1bp to 0.15%) after some rather mixed (and confusing) UK labour market data, while a bigger-than-expected rise in Australian jobs had little impact on ACGBs. USTs are a touch firmer (10Y yields down just below 0.62%) against the backdrop of the weaker stock markets, while euro area govvies are mixed (with the periphery 1-2bps weaker) ahead of today’s ECB policy announcement.

UK:
This morning’s UK labour market data were rather difficult to interpret, with the ONS’s figures based on tax data giving the most timely snapshot of conditions. These suggested that the number of people in paid employment in June was down a sizeable 649k from March to the lowest level in almost three years. But the monthly pace of decline in payrolls eased to 74k last month as lockdown measures were relaxed.

Of course, without the government’s Job Retention Scheme, which was supporting the incomes of 9.3mn employees (with a further 2.6mn on the equivalent scheme for the self-employed) at the end of last month, the increase in joblessness would have been extreme. Nevertheless, the claimant count rate – which these days includes people on very low incomes and low working hours as well as many of those out of work – dropped 0.1ppt to 7.3% (2.6mn) in June.

While the past few weeks have brought announcements of thousands of job losses from high-profile firms, the big labour market challenge is still to come, as the Job Retention Scheme will be tapered between August and October. Despite the £1k per worker ‘retention bonus’ being offered by the government to firms that retain furloughed workers into the New Year, redundancies seem bound to be forthcoming. Indeed, the OBR this week predicted that joblessness will rise to the highest since the 1930s, with a headline LFS unemployment rate of 12.0% at year-end. Among the other striking data released this morning, wage growth plummeted. Total average weekly labour earnings were down 1.2%Y/Y in May and down 0.3%Y/Y on a three-month basis to be 1.3%Y/Y lower in real terms. While the drop was driven by falling bonus payments, down 23.6%Y/Y, regular earnings were unchanged from a year ago. In addition, the number of vacancies in the three months to June fell to a record low of 333k, down almost 60%Y/Y, with drops in all sectors. On a monthly basis, however, the number of vacancies ticked up slightly in June.

Finally, the headline LFS data – which in normal times would be the principal focus – failed to provide an adequate picture of conditions. Indeed, the LFS unemployment rate rose just 0.2ppt to 4.1% in May to be unchanged at 3.9% over the first three months of the pandemic compared to the prior three months. And the LFS measure of employment dropped a rather modest 125k over the same three months. But, broadly consistent with the payroll data, that survey also suggested that almost 500k people were in employment with no working hours and no pay. Indeed, the total number of weekly hours worked in the three months to May fell 16.7%Y/Y, the most on record, to the lowest level since 1997. And average weekly hours worked fell 17.1%Y/Y to a record low of 26.7hrs.

China:
After the record contraction in Q1 (a revised drop of 10.0%Q/Q to be down 6.8%Y/Y) as it faced the brunt of the coronavirus outbreak, China’s economic rebound appears to have been somewhat stronger than expected in Q2, with GDP jumping 11.5%Q/Q to be up 3.2%Y/Y, still only about half the average annual rate last year and the second-lowest reading since the quarterly series began in the early 1990s.

The monthly activity figures were broadly encouraging with respect to conditions in manufacturing, with production in the sector up more than 5%Y/Y in June for the second successive month, not least as output from the autos sector continued to accelerate (13½%Y/Y). And overall industrial output aligned with expectations, with growth rising to 4.8%Y/Y from 4.4%Y/Y previously. The decline in fixed investment was also smaller than anticipated in June (-3.1%YTD/Y), supported by solid growth in the public sector. In contrast, however, private sector investment remained firmly in negative territory for the first half of the year (-7.3%YTD/Y).

The rebound in consumer spending remains lacklustre, however, with retail sales down 1.8%Y/Y in June, having been expected to post a modest increase. While sales of daily essentials, food, cosmetics and household electronics posted stronger growth in June, spending on clothing, autos and restaurants continued to fall. And although the jobless rate edged slightly lower in June, at 5.7% it remains high by historical standards and seems likely to weigh on the outlook for consumer spending.

Australia:
Having relaxed lockdown measures throughout May as the Covid-19 outbreak appeared under control, there was a marked improvement in Australia’s labour market in June. Indeed, the number of people employed jumped a stronger-than-expected 211k, while the number of hours worked rose 4%M/M. Of course, this reversed only a fraction of the jobs lost in the previous three months (875k), while the number of hours worked had dropped by more than 10% from March’s peak. Moreover, the pickup in employment was more than fully accounted for by part-time workers (249k), with the number in full-time work at its lowest since late-2017. And with a rise in the number of people having entered the labour force, the unemployment rate increased 0.4ppt to 7.4%, the highest since 1998. The near-term outlook remains highly uncertain, not least given renewed restrictions in Melbourne. And it remains to be seen whether the government will decide to extend its JobKeeper scheme beyond September in its Economic Statement next week.

Euro area:
Today’s monetary policy announcements from the ECB seem unlikely to excite, with no major new policy initiatives in the offing. After all, at the last meeting in early June the Governing Council agreed to increase the envelope on the PEPP purchase programme by €600bn to up to €1.35trn, and extended the horizons for net purchases at least until next June and for reinvestments at least until the end of 2022. So, it bought itself several months to sit back and watch how the economic recovery evolves before deciding whether or not to increase the envelope further.

Moreover, the Governing Council is likely to be broadly satisfied with recent developments, including the easing of pressure on periphery bond spreads, particularly those of BTPs, as well as diminished bond market volatility, which allowed the ECB last week to reduce its net purchases to the lowest since the programme was launched more than three months ago. The Governing Council should also be encouraged by recent economic data, which suggest that GDP this year might not contract quite so much as the 8.7%Y/Y central forecast published last month.

But the escalation of the pandemic in the US provides a reminder of the risks of a highly damaging second wave that could send the recovery back to square one. The ECB will also be mindful of the likelihood of a significant rise in unemployment when governments withdraw their support. And the risk of an undesirable tightening of financial conditions when credit guarantees expire was flagged in its latest bank lending survey earlier this week. So, while she will might have to reiterate that the €1.35trn PEPP total is currently understood as a ceiling, so that in the event of significant upside surprises to the outlook, the full envelope would not need to be used, Lagarde is unlikely to suggest any diminished willingness to maintain highly accommodative policy for the foreseeable future.

Finally, policy-wise, this meeting might not be completely uneventful. In particular, with excess liquidity having leapt to a new record high above €2.8trn following the latest TLTRO-iii operation, we expect the Governing Council to agree to increase the tiering multiplier to exempt a larger share of bank reserves (currently six times each credit institution’s minimum reserve requirement) from the -0.50% deposit rate.

In terms of economic data, this morning’s euro area car registrations figures showed that, despite the reopening of car dealerships across the member states, sales remained weak in June, down 22.6%Y/Y. Of course, this was a notable moderation from the declines seen in the previous three months. This in part reflected a modest increase in France (1.2%Y/Y) – the only member state to record a rise compared to last year – as the government launched new incentives for low-emission vehicles from the beginning of the month. The other large member states continued to record double-digit declines. And overall, aggregate euro area registrations in the first half of the year were down 39%Y/Y, at 3.7m units, the lowest number since the series began in the late-1980s.

Elsewhere, final French inflation figures reported a modest upwards revision from the flash estimate. In particular, headline inflation on the EU-harmonised measure was revised up by 0.1ppt to 0.2%Y/Y in June, albeit still leaving it down by 0.2ppt from May at its weakest reading for more than four years.

US:
Like yesterday’s IP data, today’s retail sales figures for June should also suggest further closing of the gap from the pre-pandemic level, albeit with less vigour than in May. Daiwa America’s Mike Moran expects growth of 4.0%M/M. The usual weekly jobless claims data are also due along with the Philly Fed and NAHB indices for July.

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