Key insights from the week that was.
It has been a very light week for data globally, and so the focus has remained on policy actions in China and expectations of a hawkish tone from Chair Powell at the Jackson Hole Symposium this weekend.
On the whole, the US data received this week was mixed. The second estimate of GDP for Q2 surprised to the upside, printing at -0.6% annualised (previously -0.9%) thanks to a modest, but broad based, upward revision to household demand, including residential construction. Still, annualised growth over the first half of 2022 is -1.1%; also, the Atlanta Fed nowcast for Q3 GDP has fallen from an initial estimate near 2.5% annualised to 1.4% currently.
On the partial data released this week: July durable goods orders pointed to little-to-no growth in equipment investment as Q3 began; pending and new home sales fell to their lowest levels since 2020 and 2016 respectively in July; and the S&P Global composite PMI fell to a contractionary read of 45 in August as activity in the services sector jolted lower – note though that the market continues to focus on the signal from the ISM PMI surveys which, for July at least, was materially stronger. All of the above suggests Chair Powell and the FOMC should be increasingly mindful of the risks to activity and the labour market as they pursue their fight against inflation.
European data meanwhile continues to show resilience amid immense uncertainty. German GDP growth for Q2 was revised up at the margin this week from 0.0% to 0.1% (not annualised). German and French business confidence also beat, admittedly very weak, expectations in August.
While a decline in activity in the second half of 2022 seems almost certain given the wave upon wave of energy price inflation and historically-weak consumer confidence, not to mention the risk of power outages, it should be remembered that the Euro Area economy began this period with strength, having grown circa 2.25% annualised in the six months to June and with the labour market historically tight. Moreover, there seems a greater likelihood of Euro Area authorities providing cost of living assistance to households than in the US; paired with robust nominal wage gains, this government support could preserve much of Euro Area households’ purchasing power over the coming year.
Another area of the global economy we perceive there to be too much pessimism over is China. Last week, we revised down our growth view for 2022 to 3.0% as a result of the Hainan COVID-19 outbreak and the current weak state of the housing sector. However, we kept to our view of strength come 2023, forecasting a year-average gain of 7.0%.
Developments this week have been supportive of the latter view, with authorities announcing another wave of stimulus targeting nation-building infrastructure investment from late-2022 while also giving local government authorities greater flexibility to support their regional economies, including residential construction. With total social financing already up 15% year-to-date to July and total fixed asset investment having risen almost 6%, the pipeline of work is clearly building quickly. As we outlined this week, there is good reason to believe that residential construction will follow once the liquidity and confidence concerns of the sector are worked through – this is in train.
Coming back to Australia to conclude. While there was no data of significance, this week saw RBA Head of Domestic Markets Jonathan Kearns deliver a speech on “Climate Change Risk in the Financial System”. Highlighted in the speech is the reality that, while we know how climate change will impact the environment and society overall, there is “uncertainty about specific aspects”. This leads to assessments of the implications for the financial system being focused on quantifying risks, specifically physical risk from weather events and a potential loss of productive capacity as well as transition risk which represents “changes to policies, technology and people’s preferences that are brought about by climate change”.
For every country, the cumulative impact and timeline will differ, so too for key agents in our financial system, namely insurers, investors and banks. Head of Domestic Markets Kearns goes on to outline the work of regulators to begin assessing the consequences of a delayed or partial transition of the economy and to develop required disclosures and taxonomies to give the financial industry and investors a clear understanding and language for assessing climate-related risks and their management.
