China’s hotly anticipated third quarter gross domestic product (GDP) figures are out. The National Bureau of Statistics announced the Chinese economy grew at 6.9% year on year in September. Which bettered market expectations of 6.8% growth in the lead up.
Good news, right? Maybe so, unless you’re the Reserve Bank. These figures may come as a grave disappointment to the central bank. They’re not bad enough to send the Aussie dollar crashing. But China’s economy is slowing nonetheless, raising the likelihood of RBA rate cuts in the future.
Before we cover what this means for Australia in more detail, let’s stay with the GDP results for the moment.
Considering markets forecast GDP at 6.8%, China’s Q3 growth is a welcome development. Even if it is by only 0.1%. But perhaps it’s not that surprising?
Few economists expected GDP to top 7% year on year (YOY) growth recorded in Q2. But there was no market consensus on how bad the Q3 data might turn out either. Predictions ranged from 6.9% to as low as 6.4%.
The pressure was on China to hit something close to 7%. It did that. Chinese officials had to find a way to make it work. And they did. Whether or not the figures are correct almost doesn’t matter. What matters is that they avoided the dreaded effect of deteriorating market confidence. Mission accomplished.
What’s more, it isn’t the first time that China’s GDP figures are under scrutiny. Remember, not many bought the official line that YOY Q2 growth really was 7%. How reliable and accurate that data was is anyone’s guess. But we know why it had to be 7%.
Back then policymakers were wary of inflaming an already troubling situation. The stock market was going through damage limitation. Economic output, led by slowing manufacturing, was suggesting the worst about China’s outlook. Policymakers needed something positive to point to. And 7% GDP growth provided a timely boost.
Yet even Chinese policymakers now acknowledge the real economy is slowing. And markets were never going to buy more spiel about eyebrow raising growth amid the recent turmoil this time around. That’s why policymakers found a good middle ground with 6.9%. That’s not to say they’re fixing GDP growth figures. Just that you shouldn’t take them as gospel.
Just watch them announce growth of 6.8% in Q4…
If nothing else, it shows how measured China’s approach to crisis management really is. And there’s no one better than the Chinese when it comes to managing headwinds.
In some ways, the Chinese eked out the best of both worlds. GDP was 0.1% better than expected, but not any lower. Otherwise it’d arouse suspicion about the pace of China’s slowdown. .
Some may still protest about dodgy calculators. But the headline GDP figure should sway markets. And it may very well lead to renewed bullish sentiment on China.
Stimulus spending is working. At least to the point where it’s preventing a sharper decline.
China’s central bank cut rates by 0.25% in July to 4.6%. That followed four previous rate cuts dating back to November 2014.
But caution remains. Industrial output, for instance, rose 5.7% YOY in September. But it fell below expectations of 6%. However retail sales were up 10.9%, beating estimates slightly.
The news is mixed, but cautiously optimistic. That’s how markets are likely to see it anyway.
Either way, expect Chinese policymakers to loosen lending terms again soon. Ensuring that GDP growth doesn’t fall below 6.8% in Q4 will require more stimulus. Which means more rate cuts, and bank reserve requirements falling further.
What will the RBA do in response to slowing GDP growth?
Back in Australia, China’s GDP growth presents something of a dilemma. For the RBA, its job isn’t getting any easier.
Remember, the RBA’s chief objective is a weak dollar. But there’s enough in the GDP data to promote a rally in commodity currencies. With the dollar at US$0.73, the RBA would prefer a few cents lower at least. For now though, the RBA isn’t likely to slash interest rates. Even if the dollar remains higher than it likes.
But China’s GDP results will affect Aussie markets. In the short term, you’ll likely see this playing out in two ways.
For one, the immediate impact of better than expected growth will perk market confidence on the ASX. Especially if China announces intentions in coming weeks to ease lending requirements. The recent ASX rally was based on the belief that markets were overestimating China’s slowdown. So that should boost investor confidence over the coming weeks.
More important though is what China’s growth means for Aussie dollar. GDP of 6.8% was probably priced in on currency markets already. So it’s likely that the news will give the dollar a bump this week. Beyond that, other factors will come into play.
Again, the RBA may have preferred weaker growth figures. Even if that sounds illogical in the context of China’s importance to the Aussie economy. But at least it would have sent the Aussie dollar trending lower.
Then again, the RBA may not mind too much. If nothing else, it restores market confidence, and helps the outlook for Australia’s exporting sector.
Key for the RBA too is how China’s growth influences US policymakers.
If we’re to believe the US Federal Reserve, China will play a big role in any decision. Why? Because China is the benchmark for the global economy. The Fed fears the potential effects of rising rates in lowering global growth prospects. But with China showing signs of stability, that could ease the Fed’s concerns. Though we won’t know for certain until the Fed meets next month.
Nonetheless, it could lay the platform for rising US rates. There’ll be a raft of corporate earnings report announcements in the US this week. US housing and employment figures are due this week as well. Combined, they could see a November or December rate hike.
The outcome of any Fed decision should determine what the RBA does too.
If the Fed tightens credit this year, then the RBA is likelier to hold steady at 2%. But the RBA might be waiting a long time for changes to US rate policy. Especially after last week’s disastrous US jobs numbers during September, which saw numbers 60,000 short of estimates. China or no China, the US economy is still an unpredictable mess…which makes any rate hikes unlikely this year.
For the RBA, the state of the domestic housing market is another factor to weigh up. But emerging signs suggest that housing growth is slowing, easing fears over a potential market crash.
With the housing market slowing, the RBA will breathe easier. It can lower rates to cheapen the dollar without stoking the housing market.
Even Westpac’s move to raise home loan rates by 0.2% probably isn’t likely to provoke a response from the RBA. If anything, it frees the RBA to make interest rate decisions more freely. Without an overheating market to worry about, the RBA can focus its rate policy on the economy.
Other things to keep an eye on this week
There’s not a lot of data to digest this week, but what little we have is important.
Keep an eye out for on NAB’s business confidence survey due out this Thursday. Of interest here will be the state of capital expenditures. Markets already expect capex spending to bottom out for this financial year 2015–16. But they’re also keen on seeing improvements, however slight, to boost the economy’s outlook.
Elsewhere, tomorrow the RBA releases its minutes from its October meeting. Whatever it says, it’s not likely to shed much light on its policy going forward. The RBA may pay lip service to China’s slowing economy. Anything it says on this is already outdated. You’ll have to wait until mid-November to get the RBA’s thoughts on today’s GDP figures.
It is likely however the RBA will comment on the slowdown in the housing market. It would’ve been nice to hear what it had to say on Westpac’s home loan rate hike from last week. But you’ll have to wait until November for that.
Contributor, The Daily Reckoning
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