China's Q4 GDP growth beats expectations

Chris Scicluna

Asian equity markets mostly on back foot today; China the exception after GDP report
Weakness in financial and energy stocks saw Wall Street end last week on a softer note, with the S&P500 slipping 0.7% to its lowest close since 6 January. The US dataflow was mixed with an upside surprise to December IP growth balanced by a disappointing third consecutive decline in retail sales in December – albeit coming off a strong Q3 – and a slight decline in the University of Michigan’s preliminary measure of consumer sentiment for January. The slight risk-off tone was reflected in a modest rally in Treasuries – the 10Y yield falling back to 1.08% – and a rally in the US dollar, with the dollar index (DXY) closing at its highest since mid-December. US cash markets are closed today for the Martin Luther King Jr. Day holiday. However, US equity futures have reopened fractionally weaker than Friday’s closing levels while Treasury bond futures are slightly firmer. The greenback is also a little stronger, with Dow Jones reporting that Treasury Secretary nominee Janet Yellen will tell senators at her confirmation hearing tomorrow that the dollar – and other currencies – should trade in line with market fundamentals, and that the US doesn’t seek a weaker dollar to gain a competitive advantage.

In the Asia-Pacific region it has been a mixed start to the week. After three consecutive declines, the CSI300 increased 1.1% after China’s GDP growth picked up more than had been expected in Q4 (see below). Stocks have so far also advanced a solid 0.9% in Hong Kong. However, most other markets have taken their lead from Friday’s decline on Wall Street. For example, the TOPIX began the week with a 0.6% loss amidst a downward revision to November IP and a mixed Reuters Tankan survey for January. In other Japanese news, PM Suga’s approval rating fell to a new low of just 33% in a Mainichi poll released over the weekend, with 71% of respondents saying that he had been too slow to issue a state of emergency to combat rising coronavirus cases. So perhaps not surprisingly, with the Diet beginning a new session, under-fire PM Suga today confirmed that the government would revise the country’s infectious diseases law to add penalties for non-compliance with measures to restrain the virus. Elsewhere, the BoK Governor’s warnings of financial stability risks from recent market exuberance continued to resonate, with the previously high-flying KOSPI following Friday’s 2.0% pullback with a further loss of 2.5%. In Australia, the ASX200 declined 0.8% and bond yields nudged lower.

China’s GDP expands 6.5%Y/Y in Q4, activity grows in 2020 despite pandemic
The focus for investors in the Asian time zone has been China’s release of the national accounts for Q4, together with key activity indicators for December. After growing an upwardly-revised 3.0%Q/Q in Q3, the economy grew a further 2.6%Q/Q in Q4. As a result, annual growth picked up to 6.5%Y/Y from 4.9%Y/Y previously – 0.3ppts above surveyed expectations, with the surprise reflecting the aforementioned revision to Q3. Moreover, in marked contrast with what will be reported in the world’s other major economies, calendar year growth was positive at 2.3%Y/Y in 2020 (0.2ppt above market expectations). According to the NBS, growth in service sector activity picked up to 2.1%Y/Y, lagging growth in the primary and manufacturing sectors which stood at 3.0%Y/Y and 2.6%Y/Y respectively. Given the composition of the December indicators discussed below, it seems likely that analysts had collectively under-estimated the contribution to growth from foreign demand in Q4.

China’s IP growth up strongly in December, retail sales and capex a bit weaker than expected
Turning to China’s monthly indicators, the IP report was consistent with the ongoing expansion that was signposted by recent PMI and trade data. Indeed, growth in output unexpectedly firmed 0.3ppts to 7.3%Y/Y, marking the fastest pace since March 2019. As a result, after a poor start to the year, production for the calendar year increased 2.3%Y/Y. In the detail, growth in manufacturing activity was steady at 7.7%Y/Y in December. All major industries reported growth, with the standouts being pharmaceuticals (where growth strengthened again to 16.9%Y/Y), machinery (15.6%Y/Y) and metals (13.0%Y/Y). Outside of manufacturing, growth in mining activity picked up 2.9ppts to a 12-month high of 4.5%Y/Y, while growth in power generation increased 0.7ppts to 6.1%Y/Y.

By contrast, the news from the demand side of the Chinese economy fell short of expectations. While retail spending increased 1.2%M/M in December, annual growth slowed by an unexpected 0.4ppt to 4.6%%Y/Y (and 4.4%Y/Y excluding autos). Moreover, even with the pick-up in December, retail spending was still down 3.9% for the full calendar year reflecting the sharp pandemic-induced contraction in spending at the beginning of the year. In a similar vein, investment spending on non-rural fixed assets increased 2.3%M/M in December. However, calendar year growth of 2.9%Y/Y was 0.3ppt weaker than the market had expected, albeit 0.3ppts firmer than year-to-date growth through November. For the full year, private sector investment increased just 1.0%Y/Y while state investment increased 5.3%Y/Y. In the detail, manufacturing sector investment was down 2.2%Y/Y – albeit a 1.3ppts improvement on the year-to-date decline recorded through to November – with positive growth only recorded in the pharmaceuticals (28.4%Y/Y), telecommunications/computer (12.5%Y/Y) and heavy transport (2.5%Y/Y) sectors. Spending in the healthcare/social work sector increased a very strong 26.8%Y/Y while spending in utilities increased 17.6%Y/Y. Property development increased 7.0%Y/Y, up 0.2ppt from the year-to-date figure in November but slightly below market expectations. Finally, after hitting an 11-month low in November, the urban unemployment rate was steady in December.

There are no further economic reports due in China this week. On Wednesday, the PBoC will announce the 1- and 5-year prime lending rates that provide the benchmark for household and corporate loans. With last week’s 1-year Medium-term Lending Facility rate maintained at 2.95% for a ninth consecutive month, the prime rates will also very likely remain unchanged.

Japan’s IP revised down in November; Reuters Tankan indicates improvement in manufacturing conditions but some weakening in services
Following on from last Friday’s activity report from the services sector, today METI released its final manufacturing report for November. Unfortunately, growth in industrial production was revised down 0.5ppts from the flat preliminary estimate and so was down 0.5%M/M – the first decline since May and leaving output down 3.9%Y/Y. However, given the strong increases recorded in both September and October, output remains well on track for an increase of over 6%Q/Q in Q4. Elsewhere in the report, shipments fell 1.2%M/M in November – a 0.3ppts larger decline than first estimated – and so were down 4.0%Y/Y. Even so, the larger revision to production meant that inventories fell 1.5%M/M – 0.4ppts more than first reported – and so were down 9.0%Y/Y. The inventory-shipments ratio fell 2.2%M/M – 0.4pts more than first reported – and so was down a revised 1.7%Y/Y. Finally, the new content in today’s release concerned capacity use, which in aggregate declined 2.9%M/M in November and so was 4.9% lower than the pre-pandemic level in January and almost 7% lower than the levels that prevailed ahead of the 2019 consumption tax hike (productive capacity has decline by around 0.8% over the past year).

Looking ahead, encouragingly, today’s Reuters Tankan indicates that in aggregate manufacturing firms detected a further improvement in business conditions in early January. The overall manufacturing diffusion index (DI) increased a further 8pts to -1, marking the best reading since July 2019. Looking ahead, the forecast DI – which measures expected business conditions three months ahead – increased 3pts to -2, indicating that respondents expect business conditions to remain broadly stable. The industry detail was somewhat uneven, however. Firms operating in the chemicals and metal products industries were significantly more upbeat, reporting that conditions had turned positive for the first time in 17 and 11 months respectively. However, after recording a very sharp improvement in the last survey, this month the autos and transport industry was less positive about business conditions, with the forecast index indicating that conditions are expected to deteriorate noticeably over coming months.

Predictably, the same survey was much less positive with regard to the services sector, doubtless reflecting early reaction to the re-imposition of pandemic-induced restrictions on business activity. The overall non-manufacturing DI fell 7pts to -11, marking the first decline since May. However, at least at this stage, the index remains higher than was the case in November. Moreover, the forecast DI fell 5pts to -9, indicating that – when the survey was taken – firms were not expecting conditions to deteriorate further over the next three months. The decline in business conditions was widespread across service sector industries, with only the information services industry immune (also not surprisingly with people being driven back indoors).

BoJ policy meeting and Outlook Report to come this week, along with trade, PMI and CPI data
Looking ahead to the remainder of the week, a key focus for investors will be Thursday’s BoJ Policy Board meeting, following which the Bank will also release its revised Outlook Report. After extending its special financing programme at last month’s meeting, we expect the Bank to retain all of its key policy settings, including its -0.1% short-term policy rate, the 0% target for 10Y JGB yields and the targets set for its various types of asset purchases. Therefore, the main point of interest will be the revisions made to the Bank’s forecasts in the Outlook Report. Relative to the forecast made in the last Outlook Report in October, we expect the Bank’s GDP and CPI outlook to be lowered for FY20 – the former due to the sharp increase in local coronavirus cases and associated restrictions on activity covering more than half of the economy, and the latter influenced by weakness in food and energy prices. But given the Bank’s usual optimism some strengthening of growth and inflation is certain to be forecast in subsequent years, with growth in FY21 plausibly boosted by last month’s third supplementary budget.

On the data front, the next important data point is Thursday’s merchandise trade report for December. Given recent PMI readings, Japan’s exports are likely to have continued their recovery with Bloomberg’s survey suggesting that analysts expect annual growth to have turned mildly positive for the first time in more than two years. So with imports likely to have remained relatively subdued, not least due to low fuel prices, the trade surplus is likely to have reached a record high. Also on Thursday, the BoJ will release the Senior Loan Officer Survey for Q4, casting light on how banks are viewing the demand and supply of credit.

On Friday, the preliminary PMIs for January will be of significant interest. Given rising local coronavirus cases and expanding locals restrictions, the services PMI is likely to weaken from the 47.7 reading seen last month, while today’s Reuters Tankan survey suggests that the manufacturing PMI should be resilient despite worrisome developments in coronavirus cases overseas. Meanwhile, given earlier indications from the Tokyo CPI, lower food and energy prices are almost certain to have driven the national CPI inflation rate deeper into deflation in December, with core inflation also likely to have remained modestly negative. Department store sales data for December is also released on Friday, completing this week’s diary.

Conte should scrape through tomorrow's confidence vote in Italian senate
After Saturday saw the Merkel-continuity candidate Armin Laschet (current Minister-president of the strate of North Rhine-Westphalia) elected leader of Germany’s ruling CDU party, attention to shifts back to Italian politics at the start of the week. In particular, PM Conte faces confidence votes in the Italian Parliament’s Lower House today and, far more challenging, the Senate tomorrow. With former PM Renzi – whose withdrawal of support for the government this week triggered the crisis – having indicated a willingness for his 18 party members to abstain, Conte should survive. But he will be significantly weakened and in need of new coalition partners. Early elections in June would still be possible.

ECB policy meeting to be uneventful; flash PMIs due at end of the week
The conclusion of the ECB policy meeting on Thursday is likely to be uneventful, not least given last month’s decision to extend its monetary policy support into 2022. The focus of the post-meeting press conference is likely to be the economic outlook in light of the recent intensification of the pandemic and tightening and extension of restrictions in several member states. Judging from her comments last week, however, President Lagarde is likely to insist that the ECB’s economic projections, published last month, remain credible.

Data-wise, this week brings several economic sentiment surveys from the euro area, which will provide a first gauge of activity at the start of the year. Given the intensification of the pandemic, we expect to see a weakening in assessments of current conditions even if vaccination programmes are underpinning confidence in the outlook. Most notable will be Friday’s preliminary January PMIs for the euro area, Germany and France. The euro area composite PMI is expected to fall from 49.1 in December due primarily to an accelerated decline in activity in the services sector. Also of note will be Thursday’s flash Commission estimate of euro area consumer confidence. In terms of hard data, the remaining final CPI releases for December will be published, with Italian, German and euro area numbers out today, tomorrow and Wednesday respectively. The flash estimate of euro area headline inflation remained unchanged in December at -0.3%Y/Y for a fourth month in a row, with the core CPI measure similarly unchanged at the series low of 0.2%Y/Y for a fourth month. Meanwhile, euro area construction figures for November will be published tomorrow alongside the ECB’s latest bank lending survey and full EU new car registration data for December.

UK December inflation reports due midweek; a busy Friday includes retail sales and flash PMIs
After last Friday’s significant upside surprise to November GDP, in a busy end to the week for UK economic data, this coming Friday’s release of December retail sales figures will likely provide further evidence as to whether a contraction in GDP was avoided in Q4. Non-essential stores in England were able to reopen on the 2 December for a little over three weeks and the latest BRC retail survey suggested that shoppers spent more in the run up to Christmas, particularly of food and online. Retail sales, excluding fuel, are forecast to have risen 0.5%M/M in December, after dropping 2.6%M/M previously, leaving them 7.1% higher compared to a year earlier. That should help to ensure, in due course, a positive print for Q4 GDP growth.

Friday also sees the release of the UK's December public finances data and GfK consumer confidence survey, as well as the flash PMI estimates for January – these are expected to suggest that activity in the services sector fell at the start of year, while growth in the manufacturing sector slowed as the boost from stock-building ahead of the end of the Brexit transition period wore off. So, the composite PMI is likely to fall firmly below the key 50 level to the lowest since May. The other top-tier UK release comes on Wednesday with the December inflation data. Headline inflation is expected to rise to 0.5%Y/Y in December, after falling to 0.3%Y/Y in November due not least to softer prices of clothing.

Biden’s inauguration the main event in the US this week with few top-tier data due
It should be a quiet start to the week in the US with markets closed today for the Martin Luther King Jr. holiday. Moreover, the economic data flow is relatively light over the remainder of the week ahead, especially early on, so the focus for many investors will like rest mainly on any developments in Washington DC, notably President-elect Biden’s inauguration on Wednesday and his subsequent raft of executive orders to reverse a number of Trump policies, including a decision to rejoin the Paris climate accord. The US data that we will receive this week mainly concerns the housing market, starting with the NAHB housing index for January on Wednesday. On Thursday, we will receive housing starts and building permits for December. Daiwa America Chief Economist Mike Moran expects starts to be little changed this month, with a possible decline in single-family starts from November’s 13-year high perhaps offset by an increase in multi-family starts, where permits jumped last month. The Philadelphia Fed’s manufacturing survey for January is also released on Thursday, while the weekly jobless claims report will also be of interest after initial jobless claims hit a five-month high last month. On Friday, given three consecutive months of declines in pending home sales, Mike expects existing home sales to report a modest 2%M/M decline in December, still leaving home sales at a very high level. As usual, the preliminary Markit PMIs for January will likely attract only a modicum of interest on Friday. With the next FOMC meeting fast approaching, there is no Fedspeak scheduled over the coming week.

Labour market and retail sales data take centre stage in Australia this week
This week’s Australian diary gets off to a slow start with no data released today and only weekly consumer confidence and the ABS’ experimental weekly payrolls data due tomorrow. Wednesday will bring the release of the monthly Westpac Consumer Confidence Index for January, which should begin to stablise after increasing to a 10-year high last month. On Thursday, there will be significant interest in the Labour Force report for December. Despite employment recording a huge 90k increase in November, Bloomberg’s survey indicates that analysts expect a further 50k increase in December – a forecast that is hard to argue with given the strong job advertising and vacancy data released in recent weeks. So if the labour force participation rate is little changed, the unemployment rate may edge down to an 8-month low of 6.7% – more than 1ppt below where the RBA expected the unemployment rate to end the year. On Friday, preliminary retail sales data for December will likely indicate a modest pull-back in spending following a 7%M/M surge in November that was driven by the reopening of stores in the state of Victoria and Black Friday sales. As usual, the preliminary Markit PMI reports for January will likely attract little interest, but the composite PMI will likely remain close to the robust 56.6 reading seen last month – one of the highest in the almost 5-year history of the series.

Kiwi data flow picks up with consumer spending and the CPI the key focus
This week the Kiwi dataflow continues to pick-up from its holiday-induced hiatus. Tomorrow, the long-running Quarterly Survey of Business Opinion should confirm the substantial pickup in business sentiment indicated by the ANZ’s monthly Business Outlook Survey. Also tomorrow, Statistics New Zealand will release the Electronic Card Transactions survey for December, capturing all consumer spending processed by electronic payment systems. Given the buoyant housing market, spending will likely have been robust. On Thursday, the November tourism and migration report will remain largely ignored given the continued closure of New Zealand’s border to most foreign travelers. On Friday, most attention will turn to the CPI. Surveys suggest that most analysts expect another quarter of very subdued inflation, only partly due to seasonal factors, causing annual inflation to remain near the bottom of the RBNZ’s 1-3% inflation target range. The manufacturing PMI for December is also released on Friday and should remain somewhat near last month’s 4-month high of 55.3.

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