Economy in Brief

In this week's newsletter, we return our focus to China, which has recently released its latest economic data and concluded its Third Plenum meeting. While acknowledging disappointing economic indicators, we also recognize China's shift away from pursuing growth for its own sake, moving instead toward prioritizing the quality of its growth. However, we highlight persistent weaknesses in China's property sector, amid continued declines in property prices despite support measures announced earlier this year. Turning to the Third Plenum meeting, which provided limited details and signaled no major policy changes, we emphasize China's renewed emphasis on “Chinese modernization” and "high-quality development". We discuss the country's ongoing challenges, particularly its growing trade surplus with the rest of the world, the resulting trade frictions, and accusations of overcapacity and dumping.

Broadly reviewing our findings, it is evident that China's strategic focus on shifting towards high-quality growth remains steadfast. However, the economy must contend with several challenges. These include uneven growth momentum, escalating debt levels, lingering weaknesses in consumer and business sentiment, potential trade-related actions by other economies, and a fragile property sector. Therefore, we might observe ongoing challenges for the Chinese economy in the near term before growth gains an even footing. It is perhaps in response to these challenges that the central bank decided earlier today to lower several policy rates by 10 basis points each. Namely, the 7-day reverse repo rate now stands at 1.7%, while the one-year loan prime rate (LPR) has been reduced to 3.35% and the five-year LPR to 3.85%.

China’s recent dataflow The latest dataflow from China has been largely disappointing. GDP growth slowed to 4.7% y/y in Q2, marking the slowest pace of growth in five quarters (Chart 1). Monthly data releases revealed more specific setbacks: retail sales growth unexpectedly dropped to 2% y/y in June, and industrial production growth cooled to 5.3%. Looking more broadly, however, it can also be argued that China's slowing economic growth was inevitable, given its stage of development and the challenges it faces, such as an ageing population. This is notwithstanding significant leaps in productivity brought about by technological advances. Furthermore, China has been restructuring its economy, shifting its focus from pursuing high growth rates for their own sake to prioritizing the quality of growth. This includes assessing the sources and drivers of growth, a topic we will explore further below in an upcoming segment.

U.K. retail sales in June fell by 1.3% after rising by 3.3% in May and falling by 2% month-to-month in April. The performance of two key industries, the food, beverages & tobacco complex, as well as clothing & footwear follows the same pattern with June declines, May increases, and April drops. April showers may have brought May flowers but then June sales soured.

Sequentially U.K. retail sales rise by 0.6% over 12 months, accelerate to an 8.3% annual rate over six months, but then decline at a 0.7% annual rate over three months.

Real sales Retail sales volumes, which refer to retail sales adjusted for price, show the same pattern as the overall retail sales, declining by 1.2% in June, rising by 2.9% in May, and then falling by 1.5% in April. U.K. retail sales volumes fall by 0.2% over 12 months, accelerate to a 7.6% annual rate of increase over six months and then slow but continue to rise at a 0.4% annual rate over three months. The retail sales pattern is not clear on whether acceleration or even growth is going to endure because the 3-month growth rate is so low, but there has been a strong improvement over six months and retail sales volumes numbers show only a slight decline over 12 months. On balance, this retail sales pattern is consistent with the idea that U.K. retail sales are stabilizing and are ready to continue to advance. Certainly, the performance of consumer confidence suggests that that's what's waiting in the wings; however, the trends themselves are indeterminate.

Car registrations One volatile element of consumer spending is spending on passenger cars. Passenger car registrations had risen strongly for two months in a row, gaining 3.1% in June and 3.3% in May. Those two very solid and strong months, however, follow an even larger decline of 8.8% in April. As a result, passenger car registrations reveal a decelerating profile based on the sequential growth rates. Over 12 months passenger car registrations rise at a 2.4% pace, over six months they fall at a 4.7% annual rate, and over three months they fall at an 11.1% annual rate. The persistent decline in spending on this big-ticket item is a bit unsettling, but on the other hand, the 3-month growth rate gets all its weakness from April whereas June and May show a sharp rebound after that April decline. Even though we're looking at sequential deterioration, it is sequential deterioration with some optimistic results being reported in the recent two months.

CBI surveys and confidence U.K. retail surveys on the month from the Confederation of British Industry (CBI) show sales for the time of year with a -41 diffusion assessment in June compared to a +22 in May. The volume of orders year-over-year register a net diffusion reading of -3 in June compared to +38 in May. Both those series posted negative numbers in April. The ups and downs of the CBI series follow the ups and downs of both real and nominal retail sales in the most recent three months. The CBI survey of retail sales for time of year does not offer a clear pattern either. When we look at the change from 12-months to 6-months, to 3-months, there is no clear trend. However, over each horizon, ‘sales for time of year’ post a negative number. The ‘volume of orders year-over-year’ logs a negative number over 12 months but then two positive numbers over three months and six months. But there is no steady progression in place so as the trend indicator there's no clarity in the volume of orders. Over three and six months, both readings are now positive numbers. Consumer confidence has a positive reading in April, May, and June that also shows consistently positive readings over three months, six months, and 12 months.

Quarter to date The quarter-to-date metrics, which are at this point for completed Q2 in the U.K., show declines in nominal sales in food and clothing industries as well as a decline in retail sales volumes and a decline for passenger car registrations. CBI retail sales for the time of year and CBI order volumes year-over-year both post negative numbers although GfK consumer confidence shows an increase. The second quarter was not particularly good for retail sales or their indicators in the U.K.

Growth has been quite weak In addition, the far-right hand column gives us the standings of the indicators and the growth rates on data back to early 2000. On that basis, sales have been weaker than they currently are only 10.8% of the time, although real volumes are holding up better: they have been weaker 28% of the time. Passenger car registrations have a standing at 56.5% which means they are above their median and have been stronger less than 45% of the time. The CBI survey has continued to spin out weak numbers with the retail sales ‘for time of year’ lower than the current reading only 5.4% of the time historically. The CBI ‘volume of orders year-over-year’ historically has been weaker only 26.1% of the time. Consumer confidence is closer to neutral with a 45.1 percentile standing a data back to early 2000s.

The chart of new passenger car registrations provides the best overview of the performance auto registrations and registrations in Europe through June of this year. Based on the numbers, there is a gain of 7.1% month-to-month in June, but there is also a decline of 10.8% in May and that follows an increase of 11.8% in April. The path of passenger car registrations is basically well sketched out by the head movement of a bobble-head doll attached to the dashboard of a ‘57 Chevy driving over a cobblestone street. And the chart is clear that there has been a lot of up and down in registrations, but the trend has been still very flat amid all the choppiness.

Cyclical behavior Vehicle registrations had begun a peaking action before COVID struck, but then the COVID episode took registrations down very sharply. They rebounded quickly and sharply post-COVID, but that didn't last very long. Russia's invasion of Ukraine took its toll on the outlook and on sentiment. As a result, another downtrend took place. That bottomed early in 2022 and there was a rebound; that rebound had pretty much run its course by mid-2023; from that point forward, we have simply been looking at this very volatile sideways performance with monthly registrations going back and forth, up and down but creating no trend.

Year-on-year growth clashes with volatility Still, over 12 months total European registrations were up by 3.1%. If we calculate that from a three-month moving average just to try to stabilize the calculation, it moves up slightly to 4.2%. The year-over-year comparison shows increases in registrations in each of the five countries detailed on the table. Registrations are strongest year-over-year in Italy where they rise 15.2%; they rise by 5.7% in Germany and by 5.1% in France. Registrations rise by a lesser amount in Spain and the U.K. as Spanish registrations are up by 2% over 12 months and U.K. registrations are up by 2.4%. Here note that the three strongest year-on-year gains are France, Italy, and Germany that had year-ago results that fell month-to-month or were only a tick higher by 0.1%. Spain and Italy, in contrast log month-on-month changes a year ago that rose 3% to 4%. So volatility haunts even the year-over-year calculations.

Even Broader calculations The big broad calculation that looks at the percent change of the most recent 12-month average against the previous nonoverlapping 12-month average shows European registrations up by 7.4% while registrations among the five countries detailed on the table show an 11.2% gain in the U.K., a 9.7% gain in Italy, a 10.7% gain in France, and a 7.7% gain in Spain; Germany puts in the weakest performance having registrations up by just 4.7%.

Performance since COVID For the sake of perspective, I also calculate the percent change in registrations compared to January 2020 before COVID struck. On that basis, European total registrations are lower by 12.7%. U.K. registrations are lower by 18%, Spanish registrations are lower by 10.7%, Italian registrations are lower by 5%, and French registrations are lower by 4.4%. Registrations in Germany are lowered by just 1.8%. Registrations in Germany have retained their level better than any other countries in the group.