Key insights from the week that was.
Data received in Australia this week focused on the consumer and housing. Housing also remained a major focus for China, albeit for very different reasons. Meanwhile in the US, yet another long partisan fight over the Budget and debt is brewing.
Australian August retail sales were broadly in line with our expectations, sales falling 1.7% in the month. The state declines were distributed in line with the severity of lockdowns, the largest falls seen in the ACT (-20%) as well as NSW and Victoria (respectively -3.5% and -3.0%). Meanwhile, SA received a large re-opening dividend (+6.6%) and WA gained 2.8%.
Dwelling approvals subsequently surprised in August, gaining 6.8% against a -5.0% consensus expectation. The detailed data contained in the release provided no evidence of another lockdown effect. Indeed, the August data instead points to strength in the underlying trend for approvals and hence housing construction over the coming year.
Having increased 85% over the nine months to March 2021 on recovery as well as the bringing-forward of activity by policy support and locked borders, the consequent unwind looks as though it may prove fleeting (-25% over the four months to July). Highlighting this possibility, August’s strength was broad based, including in sub-categories which previously saw a strong pull-forward of activity.
The established housing market also continues to show signs of persistent strength, with yet another strong monthly gain for house prices to be confirmed today for September.
From the credit data, owner-occupiers remain the driving force behind these gains, credit provided to owner occupiers up 10.8% on an annualised basis over the three months to August against 2.8% for investors. That leaves total housing credit growth at 8.1% on an annualised three-month basis, the fastest pace since April 2010. Authorities have taken note of the strength in credit growth in 2021 and are expected to act in coming months to slow momentum, with the ratio of debt to income for new borrowers reportedly a particular focus.
Switching to China, Evergrande remains in the headlines and front of mind for investors. We remain of the view that, for the real economy, even the breaking up of the company would prove only a modest and temporary negative. The principal reason this is the case is that the structure of Evergrande allows for the parent’s construction subsidiaries to be sold or allocated to other developers for completion without the burden of many of the parent company’s existing liabilities, such as their outstanding bond liabilities.
Each subsidiary’s project finance is largely self-contained, so too their workforces. As a result, households who have purchased off the plan and the workers on site can be made whole, likely with limited delays to the planned timeline – assuming authorities work quickly to bring in new developers. Payment on the rest of the liabilities of Evergrande is far less certain in quantum and timing; but, as these are high-yield, high-risk securities, investor appetite for the sector broadly and China overall should not see a lasting impact.
Where there is a greater threat to economic growth is via the power outages that have been seen in recent weeks. An already stretched supply chain trying to heal from 2020 is now facing the threat of intermittent multi-day outages in several regions. If only seen a few times, production will easily be able to catch up through Q4. However, if the outages persist, production, income and consequently GDP growth could suffer a material hit in Q4 and early-2022.
Highlighting that this situation is a real threat, China’s official PMI fell to a contractionary reading of 49.6 in September for the first time since late-2019 (excluding early-2020’s one-month pandemic shock). The deterioration was evident across production, new orders and employment, but all these outcomes likely understate the cumulative effect of the disruptions because the cost grew through the month.
Note however there are offsets to consider. After being hit by delta uncertainties in August, China’s services sector snapped back to healthy growth in September, the non-manufacturing PMI rising from 47.5 to 53.2. The construction sector measure also remained strong in the month at 57.5, near its 5-year average, despite the uncertainties around Evergrande. These outcomes suggest to us that it is best to have faith in the capacity of Chinese authorities to act to resolve economic concerns rather than immediately price weakness into baseline views. For now, we regard current circumstances as only a downside risk to our 8.5%/5.7% 2021/2022 growth forecasts as we await further information.
Finally, to the US. This week has seen little new data, but a lot of headlines regarding fiscal policy. With but a few hours to spare, another government shutdown has been averted. However, as the bill passed by Congress merely extends spending approval to 3 December, immense uncertainty surrounding the medium-term outlook for US fiscal policy remains.
Ahead, to avoid the Treasury running out of cash and a potential default event, the debt ceiling must be raised by 18 October. Here the Republicans are intent on forcing the Democrats to pass the legislation themselves, a protracted and risky approach that requires budget reconciliation measures be used. And come December, there is no guarantee that even a short-term extension of the spending authority will be easily won either, with 2022 a mid-term election year and President Biden’s infrastructure push still in play – for which the budget reconciliation process also must be used for part two, and competing priorities and preferences are apparent even within the Democratic party.
The risk to confidence is great, with the infrastructure plans of the administration already largely priced into market growth expectations and the risks around the debt ceiling largely being ignored. Highlighting this, the US dollar jumped higher this week to a 12-month high despite global risks being most pervasive and persistent within US borders.
