Sluggish giants deal the growth optimists a blow

The US and China are continuing their sub-optimal trajectory – and the latest tranche of disappointing economic data suggests meaningful growth may be a way off.

While the economic news from the US and China, the world’s two largest economies, was not dreadful it did not provide much in the way of information that would assist the global growth optimists.

In a reminder of the fragility of global economic conditions, the performance of the Chinese economy remains reasonable but it is certainly not strong. At the same time, what was a solid recovery in the US earlier this year appears to be skating towards thinner ice, with news of mediocre retail sales growth.

To China first.

Chinese industrial production rose by 9.3 per cent in the year to April which was slightly below market expectations and quite subdued when compared with the 15 per cent growth rates recorded in 2011.

At the same time, retail sales rose a solid, but not stellar, 12.8 per cent in a result that met expectations and continued the recent trend of more moderate growth in consumer demand. Fixed asset investment was the main disappointment, with annual growth of 20.6 per cent which was weaker than the market consensus was forecasting, which was for a rise of 21 per cent.

Amid all of these critical economic indicators, the Shanghai Composite Index fell 0.2 per cent to lock in another day of lacklustre performance. The main Chinese stock market is now down around 4 per cent in the past year and has dropped 8 per cent from a recent high in February. It has been one of the weakest stock markets in the world.

Li-Gang Liu, ANZ’s Chief Economist for Greater China suggested the Chinese economy “remained sluggish” although a jump in electricity production was encouraging. Indeed, Li-Gang is of the view that there is an increasing likelihood of a 25 basis point cut in the policy interest rate from the People’s Bank of China in the months ahead.

Retail sales in the US were a mixed bag rising a paltry 0.1 per cent in March. While this was stronger than the consensus forecast which was for a fall of 0.3 per cent, it followed a drop of 0.6 per cent in February and incorporated lower petrol prices which pushed the growth rate lower, simply from a price effect. With US stocks ending flat to slightly lower, the retail sales data did not deliver the positive news the market was hoping for.

Such is the sluggishness of the recent run of economic news in the US that most economists are forecasting second quarter GDP growth between 1.5 and 2 per cent (annualised rate) which follows tepid growth of 2.5 per cent in the first quarter and just 0.4 per cent in the fourth quarter of 2012. 

The long-run trend growth rate for US GDP is around 3 per cent, a pace of expansion that has not been exceeded in six years such is the unimpressive nature of the US recovery. The sub-optimal growth performance is also a key reason why the Fed has committed to keep interest rates at zero and is maintaining its aggressive quantitative easing agenda.

The news from China, in particular, was influential in seeing commodity prices edge lower. Oil, gold, natural gas and most metals prices were down, locking in a broadly flat to lower price trend for industrial commodity prices since the middle of 2012.

From the view point of commodity producers, the ongoing weakness in commodity prices continues to reflect an undesirable combination of sub-trend growth in global demand, but also the effects of what will be a quite massive addition to supply as the investment in new mines and exploration yields additional output.

In all, the news from the world’s two largest economies continues the trend of recent months of sub-optimal growth. It is why most central banks around the world are keeping monetary policy settings at extremely stimulatory levels and there is every possibility of yet more stimulus in the months ahead.

While the worst of the global recession ended a couple of years ago, the world economy is still a long way from reaching a point where it is on a path to a self-sustaining cycle of decent, job creating, inflationary growth. And that’s a pity.

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