China Macro: April data disappoint – Over the past few months, various signs of an improving momentum in the Chinese economy where visible, although with some seasonal volatility (e.g. industrial production’s spike in March). The macro data for April, however, on balance show a less rosy picture. Growth of industrial production and retail sales weakened materially and came in clearly below expectations. Fixed investment growth also slowed a bit, as the policy-driven acceleration of state-led investment was more than offset by weaker private investment. Import growth was one of the positive exceptions, having returned to positive territory again. All in all, particularly with a view to the re-escalation of US-China tensions (with higher import tariffs imposed by the US, retaliated by China), we think that risks to our base scenario have shifted to the downside again. Still, we leave our 2019-20 growth forecasts unchanged at 6.3% and 6.0% for now, as we assume a further easing of macro economic policies that should offset further drags from the trade conflict (at least partly). That said, longer term, a permanent breakdown in US-China relations would lead to an erosion of China-US centered supply chains posing additional challenges to future growth. For more background, see our China Watch: Oops, he did it again, published earlier today. (Arjen van Dijkhuizen)
US Macro: Activity data points to a weak start to Q2 – US retail sales and industrial production both unexpectedly contracted in April, though we see more reason to be concerned by the production miss than the retail miss. First, the weak retail sales (-0.2% mom) followed an exceptionally strong (and upwardly revised) March print (+1.7% mom), with year-over-year core retail sales growing at a respectable 2.9% pace. While this is slower than the average 4.8% growth we saw in 2018, solid consumer fundamentals (employment & wage growth) and the residual effects of the government shutdown (eg. delayed tax refunds) means that consumption is likely to continue to recover over the coming months.
We are less optimistic about the manufacturing sector, however. Industrial production fell -0.5% mom (March: +0.2%), taking annual growth to just 0.9% yoy, the weakest since February 2017. This is consistent with what the ISM manufacturing PMI had been signalling, with the production index now the lowest since August 2016 at 52.3. With capacity utilisation and the ISM new orders index also continuing to fall, and the trade war re-escalating – suggesting the global industrial malaise could persist for longer – manufacturing looks set to weaken further in the coming months. This should further dampen investment, which already weakened significantly in Q1 from the very strong growth we saw in 2018. Taken together, the data support our view that the strength in Q1 GDP was exceptional, and that the contributions from inventories and net exports are likely to become significant drags on Q2 growth. Beyond Q2, solid consumption and government spending growth should offset the manufacturing and investment weakness, leaving growth close to trend in the second half of 2019. (Bill Diviney)