Global Daily – Shaking off the weather

by: Maritza Cabezas , Peter de Bruin

140314-Global-Daily-Insight.pdf ()
  •  Incoming data is suggesting that the US economy is shaking off the winter weather…
  • … with February retail sales up for the first time in three months, while initial jobless claims fell further
  • China’s data disappointed at the beginning of the year, but stimulus is at hand if necessary

US retail sales up for the first time in three months…

Yesterday, saw some encouraging data in the US that suggests that the economy is starting to shake off the bad winter weather. Indeed, retail sales rose by 0.3% in February. This was stronger than the consensus (0.2%) and followed two months of declines. As usual, we do not place too much weight on the headline figure, and focus more on so-called core sales. This measure, which excludes gas, building materials and cars, is directly used to estimate non-durable goods consumption in the National Accounts and was up by 0.3% as well. Together with a rise in vehicle sales, this suggests that goods consumption rebounded in February. Admittedly, January’s core sales were revised lower from -0.3% to -0.6%, suggesting that the weather had an even bigger impact on non-durable goods consumption in that month than initially estimated, though we should not forget that spending on gas and electricity was exceptionally strong in January and helped total consumption to rise in that month.

…while early March data suggest a further improvement in the economy

What is more, early data for March suggest that consumers continued to find their way to the shops. Indeed, weekly ICSC Chain Store sales were up by 2.1% (%yoy) in the beginning of March compared to 1.5% at the end of February, and anecdotal evidence suggests that we will see an even stronger gain for March as a whole. The big picture therefore remains that consumption grew by around 2.5% qoq saar, suggesting that the economy held up much better than many had feared. We continue to look for a strong acceleration in spending this year, as the labour market recovery gains steam and we saw more evidence of this in yesterday’s initial jobless claims report. Indeed, claims fell by 9K to 315K in the week ending March 8, the lowest level in three months. Overall, we look for US economic data to rebound strongly from weather-related weakness going forward.

China’s GDP growth a repeat of 2013

Chinese data released yesterday were softer than expected, but again we are cautious in drawing strong conclusions. We think the data continue to be affected by the Chinese New Year and therefore March’s data will likely give a better indication of the economic stance. The reports released yesterday cover the January-February period and follow a string of reports, including foreign trade and loans, which have also been marred by seasonal distortions. Industrial production, which has an important weight because of its relatively close relationship to GDP, fell to 8.6% yoy from 9.7% yoy in December. Retail sales dropped to 11.8% yoy coming down from 13.6% yoy in December, while fixed investment increased to 17.9% yoy down from 19.6% yoy in December. If we are right in the view that the data is distorted, it should rebound in next few months. Alternatively, last year’s pattern of economic growth in China could be repeating itself again. A modest slowdown in the first quarter of 2013 eventually led to a “mini” stimulus and stronger growth later in the year.

Stimulus ahead to support economy if needed

Going forward, we expect domestic conditions to improve, while the global recovery should also be a positive. During the National People’s Congress, the authorities announced that the GDP growth target for 2014 is 7.5%. This is in line with our forecast and we think that it will be reached even if it is with the aid of a new stimulus package. Many of the domestic growth drivers remain in place, with rural migration and the growth of services set to continue to be strong. Although the authorities are tolerant of slower growth than in the past, they need strong growth (of above 7%) to provide a favourable environment for the implementation of an ambitious reform agenda.