There have been plenty of claims that the average fourth quarter GDP figures, the fall in part-time unemployment in February and a couple of other indicators mean the economy is weakening and needs a rate cut. That ignored solid consumer demand (try cars, for instance) and a solid contribution from manufacturing (although the sharp increase in retail stocks is a worry).
And did anyone notice that the big 1.2% fall in March quarter GDP is now a much smaller contraction of 0.3%, after a series of revisions in the past nine months? If it had stayed at a negative 1.2%, then GDP would have grown by a weak 1.4% or so last year, instead of the moderate 2.3%. September’s growth was cut from 1% quarter-on-quarter to 0.8%, but the March quarter figure has grown to 1.4% from 1.2%. Looking at the revisions and the size of the statistical discrepancy (a positive 0.3% in the September quarter versus a negative 0.3% in the December quarter), it’s possible the economy is growing at about 3% or just a bit more.
Much of the slowdown was due to comparisons with that surging in investment in the September quarter, so the economy has slowed, but remains at a fairly high level of activity.
And David Bassanese in this morning’s Australian Financial Review made a solid point about how the weakness in the labour market is due more to the slowdown in foreign student numbers than a slide in demand for labour. And, by the way, how many commentators noticed that the 15,000 part-time jobs lost were due to females in the 15-24 age group, the same one that gave us the weak figures for last December, which were overtaken by the surge in January. And could it be that Fair Work Australia’s re-regulation of part-time employment in particular has forced people, especially young women, out of the workforce?
And then there’s China slowing and that is bad news for Australia and commodity exporters such as BHP Billiton, Rio Tinto and the like.
All that may be true, but the truth is no one knows with certainty what is happening here and in China, but the indicators are not as bad as the gloomsters think and claim.
Take exports from Australia: January produced a surprise trade deficit (the second in a year), thanks to a combination of cyclones delaying iron ore exports, bad weather affecting the pace of coal exports on the east coast, and the timing of the Lunar New Year in January, instead of February, as it was in 2011. As a result Chinese economic activity in January was weaker than January a year ago and December, so demand was down, as it is every year for either January or February.
The trade deficit isn’t another factor to pressure the Reserve Bank into another rate cut. Indeed the deficit will probably disappear in the February data as iron ore and coal exports recover.
The two key Chinese indicators for Australia are crude steel production and iron ore imports. Both fell in January: crude steel production as estimated at 52.1 million tonnes by the country’s iron and steel association (which is a major source of the gloomy talk about steel demand and economic activity for Western media and analysts. It has a vested interest in talking down activity to try and cut raw material prices!). Iron ore imports fell to 59.3 million tonnes in January (which was close to the 2011 average), down 7% from December and 13.9% from January 2011 (when there was no holiday).
That fall in demand and cyclone Heidi helps explain the lower Australian iron ore shipments to China in January and the trade deficit, but local commentators and media jottings ignored that point. They also ignored the point that in January 2011, import volumes were boosted by stockpiling by factories, such as steel mills, ahead of the Lunar New Year the next month.
Then on Saturday, China released its February import and export data (a 22-year high deficit of $US31.5 billion as exports “only” rose 18.4% and imports soared 39% from February 2011 (when the Lunar New Year closed factories for a week and cut import and export volumes).
So, imports of iron ore soared 34% last month (from February 2011) to a near record 64.98 million tonnes. That’s the second highest monthly volume on record. February iron ore imports were also 10% above January’s level (and helped by an extra day this year of course, as were all figures for February).
China’s crude steel output in February rose 3.3% from a year earlier to 55.88 million tonnes and in the first two months of this year, the country produced 112.62 million tonnes of steel, up 2.2% from a year ago. This means crude steel output in January alone was 56.73 million tonnes. That’s 8% above the earlier estimate of 52.1 million tonnes from the Chinese steel industry association. With the extra day, Chinese steel production fell in February from January, the fall was about 2.8 million tonnes given Chinese steel mills were producing 1.93 million tonnes a day last month.
It’s not weak demand, nor is it a repeat of the soaring growth in production we saw in 2009-10. Global iron ore spot prices have been about $US140 to $US144 a tonne for much of this year (they spiked above $US150 briefly when cyclone Heidi closed the WA iron ore ports and Vale of Brazil declared a temporary force majeure on some of its exports for the same month). The surge in iron ore imports last month should see Australian iron ore exports rise when the next trade data is released early next month.
And it wasn’t just a jump in steel output and iron ore imports in February that caught the eye (even after allowing for the impact of the Lunar New Year in February of last year and the extra day). Other key import indicators watched closely are the volume of Chinese copper imports (its the biggest consumer in the world) and the monthly oil imports: both hit record or near record levels in February.
Copper imports soared in February, jumping 17% from January to 484,569 tonnes, and double the level of February 2011, while oil imports hit a daily record of 5.95 million barrels, up 18.5% and well above the previous record of 5.67 million barrels set last September.
These monthly imports figures they tell us a lot about what is happening in the Chinese economy, especially when you watch the figures over time and try and look through the month-to-month fluctuations.
Consumer price inflation fell sharply to an annual rate of 3.2% from 4.5% in January (the two-month average was 3.9%, just under this year’s target of 3.9%). It had been as high as 6.5% in July of last year. Producer prices rose an unchanged 0.7% in February and had been 7.1% mid way through last year.
So, providing price growth continues to slow or remains around the current rate, then a rate cut and further relaxations in asset reserve ratios on banks (which force banks to cut their lending) are very much on the cards. And that in turn means the Chinese government has engineered a soft landing, not the hard landing that many gloomsters, especially US hedge funds, have claimed was on the cards.