China's Q2 GDP growth slowest in 27 years

Chris Scicluna
Emily Nicol

While Japan’s markets were on holiday today, the week has got underway with a focus on China, where Q2 GDP data broadly aligned with expectations but June activity figures were slightly firmer than anticipated (detail below). As such, China’s equity markets have so far made very modest gains (CSI300 up 0.2%), as have those in Hong Kong (currently up about 0.1%) while Taiwanese stocks were a touch firmer (the TAIEX closed 0.5% higher on the day). Forex markets have been uneventful (the yen depreciated slightly back to close to 108.0/$, and the euro has been steady close to $1.127). And while UST yields have ticked higher after opening in Europe this morning (10Y yields up about 1bp to 2.135%), euro area govvies are largely little changed although BTPs have outperformed again (10Y yields down 3bps back close to 1.70%).

Looking ahead, there should be no showstoppers for markets on the economics front this week. But while a July Fed rate cut now seems baked in, the outlooks for monetary policy at the ECB, BoE and, to some extent, the BoJ remain uncertain. And so, the top-tier data over coming days will still be closely watched, with highlights including US retail sales and IP, Japanese trade and inflation, final euro area CPI, and UK labour market, inflation and retail sales. Meanwhile, the major US banks will get the quarterly reporting season underway, kicking off with Citigroup today with JP Morgan and Goldman Sachs following tomorrow.

There were no major surprises from today’s Chinese GDP figures, which reported a slowdown in annual growth in Q2 by 0.2ppt to 6.2%Y/Y, the weakest reading since the quarterly series began in 1992. Unsurprisingly given the more challenging external environment, not least the ongoing impact of the tariff war with the US, the weakness was dominated by the industrial sector, with growth moderating 0.5ppt in Q2 to 5.6%Y/Y. While growth in the services sector was unchanged at 7.0%Y/Y, this matched its softest pace since the early 1990s. The seasonally adjusted GDP figures, however, were slightly more upbeat, with growth up 0.2ppt to 1.6%Q/Q, the strongest for three quarters.

The monthly activity data for June, also published today, were also somewhat more encouraging about growth towards the end of the quarter. In particular, industrial production increased 6.3%Y/Y in June, up from growth of 5.0%Y/Y previously, with a similar improvement reported in the manufacturing sector. Retail sales were also much firmer in June, with the 9.8%Y/Y increase the largest since March 2018 and 2.6ppts above the trough in April. And fixed asset investment growth was a touch stronger than expected in June, up 0.2ppt to 5.8%YTD/Y, with private-sector investment growth up 0.4ppt on the month to 5.7%YTD/Y. While public investment growth slowed in June to 6.9%YTD/Y, this was still slightly stronger than the increases seen in Q1.

The June data might well be suggestive of improved momentum heading into the second half of the year, particularly after Friday’s credit data beat expectations to suggest that efforts to boost lending were taking effect. Nevertheless, as everywhere in the global economy right now, the risks to China’s economic outlook likely remain still skewed to the downside. And with underlying inflationary pressures muted, further monetary easing this year seems likely, with at least one 25bps cut to the required reserve ratio expected from this quarter.

With Japanese markets closed for the Ocean Day holiday today, the only noteworthy release in the first half of the week will be Wednesday’s overseas visitor numbers for June, which will also provide a breakdown for spending by tourists in the second quarter. Focus on Thursday will turn to June’s trade report, with exports likely to have fallen again compared with a year earlier, while imports likely posted modest growth, therefore suggesting that net goods trade provided a notable drag on GDP growth in Q2. The Reuters Tankan survey, due the same day, will give a first indication of business conditions in July. In addition, the BoJ will publish its latest senior bank loan officer survey that day.

Further insight into economic activity in the second quarter, meanwhile, will come in Friday’s all industry activity figures for May, which are expected to report modest growth for the second successive month. Likely of most interest on Friday, however, will be the national inflation figures for June, which are expected to show that the headline CPI rate moved sideways at 0.7%Y/Y. But when excluding fresh food prices, the BoJ’s forecast core CPI measure is expected to fall 0.2ppt to just 0.6%Y/Y, a near-two-year low. Finally, in the markets, the MoF will sell 20Y JGBs on Wednesday.

Euro area:
Ahead of next week’s ECB meeting, this week brings a few releases of note including final euro area inflation figures for June on Wednesday. Like the French number (1.4%Y/Y), Friday’s final estimate of Spanish inflation on the EU measure was left unrevised from the flash (0.6%Y/Y, down 0.3ppt principally due to a sharp drop in the transportation component). Given the upside revision to the German final figure (up 0.2ppt from the flash to 1.5%Y/Y), we expect the euro area’s headline CPI rate to be revised higher from the flash estimate of 1.2%Y/Y, which was unchanged from May. Risks to the preliminary core inflation rate – which increased 0.3ppt to 1.1%Y/Y – are also skewed to the upside.

Among other data from the euro area this week, Wednesday will see the release of new car registrations figures for June, as well as construction output numbers for May. Ahead of this, the euro area’s goods trade report for May is due tomorrow, before the ECB’s balance of payments figures are published on Friday. At the national level, the most noteworthy releases will come tomorrow, with Germany’s ZEW survey of investors for July and final Italian CPI figures for June. Politics-wise, MEPs will vote tomorrow evening whether or not to reject the EU leaders' nomination to be the next head of the European Commission, Ursula von der Leyen. Supply-wise, Germany will sell longer-dated bonds on Wednesday, while France and Spain will sell bonds with various maturities on Thursday.

After a quiet end to the week for UK economic news, the coming week will bring a number of top-tier releases, kicking off tomorrow with the latest employment and wage figures for May. The labour market has remained a ‘good news’ story in the UK, with employment having rebounded in April to a record high. But not least with firms increasingly downbeat about the near-term outlook in light of persistent Brexit uncertainty, we would expect some payback in May, although the three-month jobs growth number is likely to have remained positive. Having slowed to a seven-month low in April, wage growth will also be closely watched with an eye on BoE policy.

Meanwhile, we expect Wednesday’s inflation release to show the headline and core CPI rates moving sideways in June, at 2.0%Y/Y and 1.7%Y/Y respectively. That day will also bring the ONS’s house price index for May, as well as the BoE’s latest quarterly credit conditions survey. Focus on Thursday, meanwhile, will be on June’s retail sales figures, which will provide further insight into household consumption in the second quarter. We expect a third consecutive monthly decline to conclude a weak performance on the High Street in Q2. Finally, Friday will bring the latest public finance figures for May. In the markets, the DMO will sell 2037 Gilts tomorrow.

In the US, the coming week's data-flow seems highly unlikely to do anything to shift the widely held expectations of a Fed rate cut at the end of this month. Nevertheless, tomorrow will be a busy day for key economic releases, including industrial production and retail sales figures for June. Expectations are for retail sales growth to have slowed at the end of the second quarter, albeit in part due to lower gasoline prices weighing on the auto fuel component. Meanwhile, manufacturing output is likely to have posted a modest increase for the second successive month, following marked weakness in the first four months of the year. That day will also bring business inventories figures for May, import and export price indices for June and the NAHB housing index for July. Housing starts numbers for June will follow on Wednesday, alongside the Fed’s latest Beige Book. Sentiment indicators due in the coming week include the Empire manufacturing index (today), Philly Fed index and Conference Board’s leading indicators (Thursday) and the preliminary July University of Michigan consumer confidence survey (Friday). In the markets, a 10Y TIPS auction is scheduled on Thursday.

After a quiet start to the week, tomorrow will bring the minutes from the RBA’s latest policy-setting meeting which saw it cut the cash rate by a further 25bps to 1.00%, for any insights into the likelihood of further policy easing. In this respect, the most noteworthy data this week will be Thursday’s labour market report, which is expected to show another modest increase in employment in June to leave the unemployment rate unchanged at 5.2%.

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