Weekly global economic update has been saved
Cover image by: Sofia Sergi
There has been both good news and bad news for the US economy. Here are some of the highlights:
On the negative side, there are indications of a weakening US consumer. For example, retail sales fell sharply in March, down 1% from the previous month. In addition, retail sales were up only 2.9% from a year earlier. Considering that this was in nominal terms and that inflation remained high, real (inflation-adjusted) retail spending fell considerably from a year ago. From a month earlier, there was an especially sharp decline in spending at stores specializing in discretionary durable and nondurable goods. There was also a sharp decline in spending at gasoline stations, a reflection of declining energy prices. Spending online was up strongly and spending at restaurants was up modestly.
o In the first quarter of 2023, real GDP was up 4.5% from a year earlier, the fastest growth since the first quarter of 2022. However, it was below the government’s goal of 5% growth. Moreover, it was far below the average growth seen in the decade prior to the pandemic. Still, real GDP was up 2.2% from the previous quarter, the fastest pace since the fourth quarter of 2020. The principal areas of strength were retail sales (up 5.8% from a year earlier), exports (up 8.4%), and infrastructure investment (up 8.8%). The latter reflected the government’s efforts to boost growth through fiscal policy. Overall public sector investment was up 10%, a reflection of the government’s support for the state sector. On the other hand, private sector investment was weak, growing only 0.6% in the first quarter.
o The strength of exports was relatively concentrated in exports of automobiles and exports to Russia. This alone may not allow for sustained growth. Thus, it is reasonable to worry that China’s strong export growth could peter out in the coming months, especially given the continued weakening of the global economy and the risk of recession in large markets such as the United States and the European Union.
o The strength of the retail sector was especially notable in March when sales were up 10.6% from a year earlier, the fastest since June 2021. Recall that, the removal of pandemic-related restrictions was followed by another outbreak of COVID-19 that initially had a negative impact on consumer spending and mobility. That outbreak ran its course in January: The March data reflects the rebound following the outbreak. Among the retail categories that saw very strong growth were jewelry (up 37.4%), clothing (up 17.7%), and automobiles (up 11.5%). On the other hand, spending was weak for home appliances (down 1.4%), building materials (down 4.7%), and furniture (up 3.5%). These categories were likely hurt by the weakness in the housing market.
o China’s industrial production grew at a modest pace, up 3.9% in March and up 3% in the first quarter versus a year earlier. The one bright spot was the automotive sector where output was up 13.5% in March versus a year earlier.
o Fixed asset investment in China grew 5.1% in the first quarter versus a year earlier. This included a 7% increase in the manufacturing sector. Investment in the property sector, meanwhile, fell 5.8%. Housing starts were down 19.2% in the first quarter versus a year earlier. In addition, home sales by area were down 1.8%. However, home prices have started to recover, rising in March at the fastest pace in 21 months. This likely reflects government efforts to boost transactions in the sector. Still, despite the government’s policy of supporting the completion of existing projects, it is expected that development of new property will remain suppressed for a while.
Going forward, most analysts expect China’s economy to accelerate in the second quarter. However, there remain significant headwinds. Export growth could slow down given weakness in the global economy. In addition, the evident weakness of private sector investment suggests that private sector sentiment has been shaken by the government’s efforts to strengthen the state sector. Plus, private sector businesses that are export-intensive might be thinking about boosting capacity outside of China in order to avert the impact of Western sanctions and tariffs. In releasing the GDP data, the government stated that domestic demand remains “inadequate” and that “the foundation for economic recovery is not yet solid.”
China’s growth matters not only for China but for the world. The economy accounts for about 19% of global GDP and a larger share of global trade. If the recovery accelerates, this will be good for global growth. It could also cause an increase in global commodity prices at a time when the world is just starting to get inflation under control. For now, the government’s focus appears to be on growth rather than inflation. Monetary policy and, to a lesser extent, fiscal policy, are relatively easy. This is not likely to change any time soon.
One important critic of this fragmentation is Christine Lagarde, president of the European Central Bank (ECB). In a major speech this week, she said that “we may see more instability as global supply elasticity wanes; and second, we could see more multipolarity as geopolitical tensions continue to mount.” She expressed concern that the conflict between China and the West will disrupt global supply chains in key industries. She noted that Europe depends on China for 98% of its rare earth minerals and that the United States depends entirely on imports for 14 critical materials. China is reported to be considering restricting exports of rare earths as retaliation for Western export controls.
Lagarde also suggested that the current high inflation will be difficult to suppress in an environment of economic fragmentation. She said that, “if global value chains fragment along geopolitical lines, the increase in the global level of consumer prices could range between around 5 per cent in the short run and roughly 1 per cent in the long run.”
Cover image by: Sofia Sergi