Connect with us

Markets

China Roars Back to Lift Global Outlook as U.S. Consumer Weakens

Published

on

US economy
  • China Roars Back to Lift Global Outlook as U.S. Consumer Weakens

China’s economy stormed back in the first quarter, clocking its first back-to-back acceleration in seven years and bolstering the global growth outlook just as signs of subdued consumer spending have surfaced in the U.S.

The Chinese economy accelerated to a better-than-expected 6.9 percent, powered by strength in housing, infrastructure investment, exports and retail sales. And it looks to have done so without worsening credit risks, a welcome development for economists worried about the nation’s towering debt burden.

The world’s second-biggest economy accounted for about one-third of global growth last year and, given the strong first quarter data, is on track to contribute at least as much in 2017, according to Rob Subbaraman, chief economist for Asia ex-Japan at Nomura Holdings Inc. in Singapore.

“China, at least in the near term, is in a sweet spot with growth momentum strong and inflation pressures easing,” said Subbaraman. “Whichever way you dice it, the first quarter was a strong set of numbers.”

The robust economic showing is an auspicious start to a politically eventful year for President Xi Jinping and Premier Li Keqiang, whose government has set a growth target of 6.5 percent or above. Policymakers are bent on steady growth to ensure a smooth leadership reshuffle expected later this year.

Rebalancing

The Chinese economy is in the midst of a major structural shift away from its past reliance on heavy manufacturing and export-led growth toward services and consumer demand. Officials are also trying to avert a trade war with the U.S., manage capital outflows amid depreciation pressure on the yuan, and slow the growth of household, corporate and government debt.

For the world economy, the Chinese rebound may deliver positive second-round effects.

“Emerging markets will benefit from this strength in Chinese growth firstly through commodities demand and support for commodity prices,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit in Singapore. “Secondly, the whole Asian manufacturing supply chain will get a boost from stronger Chinese growth.”

China’s imports from the Association of Southeast Nations surged 22.7 percent in March from a year earlier while those from Singapore were up 41.5 percent. From commodities exporter Australia, imports jumped almost 75 percent.

The first-quarter expansion came as the real estate market shrugged off policy constraints, exports surged and retail sales rebounded. Economic growth in March from a year earlier jumped to 7.6 percent, up from 7 percent in February, according to a Bloomberg Intelligence gauge.

Financial risks also were contained as nominal growth rose at the fastest pace since 2012 — 11.8 percent in current-price terms — making the problem of excess leverage look a little more manageable, according to Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing. Total credit reached about 258 percent of economic output last year, up from 158 percent in 2005, according to Bloomberg Intelligence estimates.

Debt Growth

Debt financing expanded about 12 percent, roughly on par with nominal GDP growth, said William Adams, senior international economist at PNC Financial Services Group in Pittsburgh, who previously worked for the Conference Board in Beijing. In recent years, overall debt growth had been expanding faster than the overall economy.

“This is a big deal,” he said. “The gap between nominal GDP growth and credit growth was often cited as the strongest quantitative argument that China’s growth model is unsustainable. If credit growth remains moderate as it has been since mid-2015, and nominal GDP growth continues at its current pace or picks up, this vulnerability in China’s growth model will seem less urgent.”

China’s acceleration comes as U.S. inflation took a surprising step back in March at the same time as retail sales dropped for a second month, according to reports Friday. While the pullback at retailers underscored a weak first quarter for consumer spending that economists had already penciled in, the inflation data are what surprised given recent signs that businesses had been able to regain pricing power.

A further cooling of price pressures and modest household demand would raise questions about whether the economy could withstand a mid-year move by the Federal Reserve to lift borrowing costs.

Not all the news is good. The downside to China’s acceleration is its reliance on an old formula: growth driven largely by credit-fueled investment in infrastructure and property.

“The first quarter figure is undoubtedly upbeat and encouraging and it seems to have changed the short-term sentiment substantially,” said Zhu Ning, author of “China’s Guaranteed Bubble” and deputy director of the National Institute of Financial Research at Tsinghua University in Beijing. “But a large part of growth is achieved by another unprecedentedly large fiscal stimulus, infrastructure investment, and debt escalation, which is currently being camouflaged by increasing housing prices and land values,” he said.

Global Demand

Trade tensions with the U.S. under President Donald Trump may also deteriorate again if a “100-day plan” to discuss trade fails to yield results.

Though global demand will remain conducive and infrastructure investment will be robust in this political year, domestic momentum overall will ease in the second half, said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. That’s because measures to curb house purchases in many large cities will start to weigh on real estate investment.

For now though, China’s expansion is a welcome boost for a global economy that’s still navigating a fragile recovery as it shakes off a hangover from the global financial crisis.

“The upturn in Chinese growth is a very positive indicator for the Asia Pacific and world growth in 2017, as well as underpinning the near-term outlook for global commodities,” said Biswas with IHS Markit.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Published

on

Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

Continue Reading

Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Published

on

Crude oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

Continue Reading

Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Published

on

oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

Continue Reading

Trending