Chinese growth at five year lows

Chinese data; Reserve Bank Board minutes; Consumer confidence

• Chinese economic data: The Chinese economy grew at 7.3 per cent annual pace in the September quarter – ahead of forecasts (7.2 per cent) but the weakest growth in five years.
• The Chinese economy grew by 1.9 per cent in the September quarter, down from 2.0 per cent in the June quarter.
• Reserve Bank Board minutes: There was no discernible change in the tone of the Board minutes when it comes to view on interest rates. The Reserve Bank reiterated “that the most prudent course was likely to be a period of stability in interest rates”.
• Housing the key focus: Board members discussed the need to monitor and ensure responsible lending practices. Policymakers noted that “the current setting of monetary policy was accommodative, with lending rates remaining very low and continuing to edge lower over recent months as competition to lend had increased. In this context, members discussed the importance of lenders maintaining strong lending standards and the ongoing dialogue between the Bank and APRA on the matter”.
• Consumer confidence falls: The weekly ANZ/Roy Morgan consumer confidence rating eased by 1.9 per cent in the week to October 19 after lifting by 1.1 per cent in the prior week.

What does it all mean?

• There are two reasons why the Chinese economic data is important. First, China is the biggest driver of the global economy. And second, China is Australia’s largest trading partner.
• Overall it is clear that the Chinese economy slowed over the past year with growth in the September quarter easing from 2.0 per cent to 1.9 percent. The world’s second largest economy is growing at a 7.3 per cent annual pace. Yes, it is the slowest growth rate in five years but importantly inflation remains well contained. In fact the result was ahead of forecasts, while the monthly data showed a surprising lift in industrial production.
• Importantly the slowdown was engineered by policymakers to ensure that a sustainable level of growth is maintained. In addition Chinese officials have made it clear that they are willing to sacrifice a faster pace of growth in order to correct imbalances across the economy – predominately focusing on improving environmental reforms, more transparency in the financial system and more equitable social reforms.
• Whether it is production, investment or retail spending, growth rates will slow in coming years as the economy matures. But an economy of 1.3 billion people travelling at around a 7 per cent annual pace is a sight to behold. The focus will now shift to the HSBC/Markit “flash” October manufacturing activity index, out next Thursday.
• The Reserve Bank continues to preach stability in interest rates. There is nothing in the latest minutes to suggest that Board members have become more optimistic, nor more pessimistic. The Board believes that the cash rate is at the right level to support the economy and keep inflationary pressures in check.
• However the Central Bank did once again discuss the ongoing lift in investor housing demand, noting that annual growth of investor demand has increased by close to 10 per cent compared with around 7 per cent growth in overall housing credit. Interestingly the focus by Board members was on ensuring responsible and sustainable lending practices with “ongoing dialogue between the Bank and APRA on the matter”.
• The Reserve Bank will continue to assess measures to cool the demand for investor housing. Importantly policymakers will take a soft approach when introducing any new measures.
• Despite the latest pullback, consumer confidence remains healthy. Over the past few months households have been generally upbeat, shrugging off global economic concerns. The mild pullback over the past week is probably more to do with the recent slide in equity markets than any deep structural issue with household finances.
• In fact even in the latest survey Aussie households’ views about their finances over the next 12 months held at 6½-month highs. In addition confidence levels are holding just 4 per cent shy of the seven month highs reached in late July.

What do the figures show?

Consumer sentiment:

• The ANZ/Roy Morgan consumer confidence rating fell by 1.9 per cent to 111.6 in the week to October 19 after rising by 1.1 per cent in the previous week. The confidence rating is down 4.0 per cent on the 7-month highs recorded for the week to July 27.
• Four of the five components of the index fell in the latest week:
• The estimate of family finances compared with a year ago was down from +9 to +4;
• The estimate of family finances over the next year was unchanged from +25 to +25;
• Economic conditions over the next 12 months was down from -4 to -5;
• Economic conditions over the next 5 years was down from +4 to +3;
• The measure on whether it was a good time to buy a major household item was down from +35 to +31.

Reserve Bank Board minutes:

• Minutes of the Reserve Bank Board meeting held on October 7 can be found here.

Chinese economic data

• The Chinese economy grew at a five-year low of 7.3 per cent annual pace in the September quarter, mildly ahead of forecasts (7.2 per cent). The economy grew by 1.9 per cent in the September quarter, down from 2.0 per cent in the June quarter.
• Industrial production rose at an 8.0 per cent annual rate in September, above the forecast average (7.5 per cent) and up from the 6.9 per cent annual rate in August. Production was up by 8.5 per cent on a year ago for the first nine months of 2014.
• Retail sales rose at an 11.6 per cent annual rate in September, mildly below forecasts (+11.7 per cent) and down from the 11.9 per cent annual rate in August. Over 2014, annual growth has averaged 12.0 per cent. But in real terms, spending was up 10.4 per cent in September – the fastest growth in nine months.
• Urban investment rose at a 16.1 per cent annual rate in the first nine months of 2014, below forecasts of a 16.3 per cent increase and below the 16.5 per cent growth recorded for the eighth months to August.

Imports of goods:

•  “In seasonally adjusted terms, goods debits rose $1,480m (7 per cent) between August and September 2014 to $22,948m. Intermediate and other merchandise goods rose $973m (11 per cent), capital goods rose $187m (4 per cent), consumption goods rose $186m (3 per cent) and non-monetary gold rose $135m (59 per cent).”
• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the reserve Bank.
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.
• At present the Reserve Bank is in a delicate balancing act of keeping interest rates low to support the broader economic recovery while hoping house price growth eases over the medium term. And the ongoing lift in home building should provide policymakers with some added comfort.
• The latest Chinese economic data was mildly better than expectations. And while the longer term growth story remains sound, it is likely that the ongoing structural reform in China is likely to create further volatility and ongoing patchiness in activity in coming months.
• The latest data give the Reserve Bank no reason to change its views on the economic recovery or interest rates. Low rates will continue to foster stronger domestic growth. CommSec expects no change to monetary policy until next year with one rate hike pencilled in the March quarter of 2015.

What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the reserve Bank.
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 16th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10^th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

What are the implications for interest rates and investors?

• At present the Reserve Bank is in a delicate balancing act of keeping interest rates low to support the broader economic recovery while hoping house price growth eases over the medium term. And the ongoing lift in home building should provide policymakers with some added comfort.
• The latest Chinese economic data was mildly better than expectations. And while the longer term growth story remains sound, it is likely that the ongoing structural reform in China is likely to create further volatility and ongoing patchiness in activity in coming months.
• The latest data give the Reserve Bank no reason to change its views on the economic recovery or interest rates. Low rates will continue to foster stronger domestic growth. CommSec expects no change to monetary policy until next year with one rate hike pencilled in the March quarter of 2015.