China data good for Australia

Despite diplomatic tensions getting in the way beef, barley and wine exports, Australia’s economic exposure to the Chinese recovery is good news    

3 September 2020 | Shane Oliver, AMP Capital

In a time where our national mood fluctuates on a daily basis with the latest case numbers from Victoria, some of the most positive news is actually coming out of China.

Economists have been busy revising their growth forecasts for China on the back of strong second quarter GDP numbers. There are those who may harbour scepticism around official data out of China, but in this case the headline figures appear to be backed by other private economic indicators.

Private sector manufacturing Purchasing Managers Indices (PMIs), for example, have recovered to levels around their ten-year average leading.

Coal movements through major ports in August were up around 10% year-on-year, after lagging below historical levels for most of the first half of 2020, and rebounding traffic congestion and property transaction volumes tell a story of city life returning to normality.

China pulls off “Deep V” recovery

This is good news for Australia in several different ways. First, increased economic activity out of China should support our own recovery. Second, the fact that China appears to have pulled off a ‘deep V’ rebound, despite having dealt with its own second wave is encouraging for other countries hoping to emulate that feat.

Recent PMI updates for other economies in August have been a mixed bag: flat in Australia and Europe, for example, and rising in Japan, but on the whole the news is more positive than negative.

Since the beginning of the pandemic we’ve been running an in-house US Economic Activity Tracker, which is drawn from a range of indicators as varied as rail freight loads, retail foot traffic, and cell phone mobility indices. It shows that the country’s strong recovery out of April stalled in June, but that activity has begun to trend upwards again, albeit at a steadier pace.

World GDP is tracking to return to positive growth in the current quarter, although this doesn’t mean we will be straight back to normal. We look to have a avoided a worst-case scenario, but activity will take some time to return to normal levels, and higher unemployment will continue to persist as we deal with the lasting effects of lost activity in the June quarter.

In turn, excess capacity in the labour market should keep a lid on inflation and give the RBA and other central banks room to maintain a low interest rate environment for a while yet, but it’s unlikely that the government will be able to ease up on their fiscal stimulus any time soon.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital