Beijing Signals New Worry on Growth China’s leaders kept the growth target for their giant economy unchanged at 7.5%, but signaled that they are more concerned than ever about reaching it, giving themselves the option of letting credit flow freely to keep from falling short.
The suggestion of more lending to buoy growth—despite repeated recent efforts to rein in debt—is the latest sign of government unease that a slipping economy could trigger higher unemployment and corporate failures, aggravating already high social tensions. (…)
In his work report to the National People’s Congress, Premier Li Keqiang said government spending is being increased by more than 9%, with a push to build more public housing, and the overall fiscal deficit is projected to rise more than 12%.
Mr. Li called for a “balanced” monetary policy, in a change from the “prudent” monetary policy used last year. The slight wording change allows the government to loosen credit, a move that economists have said would likely give a short-term boost but worsen the growing credit problems plaguing local governments and the shadow-banking market.
Economists are bracing for trust and bond defaults this year and greater market volatility given the number of debt-plagued companies close to the edge. A third of the outstanding 4.6 trillion yuan ($750 billion) trust loans are due to mature this year, which many struggling firms rely on for capital.
Many construction and real-estate companies are also heavily dependent on debt-laden local governments for work building dead-end projects. Nearly half the 17.9 trillion yuan debt held by local governments in mid-2013—up 67% from the last audit in 2010, according to a National Audit Office report—comes due this year. Standard Chartered economistStephen Green says there is a better-than-50% chance that a local-government bond will default this year.
China’s Ministry of Finance said military spending this year would rise more than 12%—the largest percentage rise in defense spending since 2011 and continues an almost unbroken string of large increases for two decades. (…)
REASONS FOR WORRY:
CEBM’s March survey results revealed lower-than-expected sales across all industries. The CEBM Industrial Sales vs. Expectations Index decreased significantly to -32.9% in February from -4.3% in January.
Property transactions in 1st and 2nd tier cities were sluggish following the Spring Festival holiday. According to our respondents, depressed sales activity was due to recent mortgage policy tightening and a low number of sales campaigns. In general, lower-than-expected sales activity in February can be attributed to both seasonal effects as well as a non-seasonal weakening in demand.
Looking forward into March, the forward-looking CEBM Industrial Expectations Index (SA) slightly increased to -2.1% from -2.5% in January. Despite universally weak sales, certain industries are still optimistic towards March. Container freight exporters, automakers and home appliance retailers hold an optimistic sales outlook for March.
In the industrial sector’s upstream, steel mills reported weak demand caused by deteriorating steel trader liquidity; several medium-sized steel mills decided to stop production in February. Cement manufacturers also reported deteriorating demand due to sluggish property sector activity, cold weather, as well as environmental protection policies.
Steel mill and cement manufacturer respondents are pessimistic towards March, but real estate developer and real estate agency respondents in 1st and 2nd tier cities are relatively optimistic. Even though housing price appreciation has started to decelerate and the cost of capital continues to rise, real estate developer demand for land and developer willingness to accelerate construction activity is strong.
Euro-Zone Economic Expansion Accelerates The euro zone’s economic recovery strengthened in the early months of 2014, aided by the largest rise in retail sales since late 2001.
Data firm Markit Wednesday said its composite Purchasing Managers Index for the euro zone—a measure of activity in the manufacturing and services sectors—
rose to 53.3 in February from 52.9 in January. That was above the preliminary estimate of 52.7 released last month, and the highest since June 2011. A reading above 50.0 for the purchasing managers index indicates an expansion in activity.
In a separate release, the European Union’s statistics agency said retail sales grew by 1.6% in January from December, the largest increase since November 2001.
Europe retail trade is highly volatile, to say the least. January’s 1.6% jump combined with upward revisions to November (+1.1% vs +0.9%) and December (-1.3% vs -1.6%) data result in a better picture for Christmas sales. Nov-Jan volume rose 1.4% after falling 0.3% in the Aug-Oct period. Core sales also look healthier at +1.9% for January following -1.1% in December, revised from -1.8%. Europeans seem to have celebrated Christmas in January this year.
Spain’s jobs show first rise since 2008 Data break a 68-month streak of year-on-year declines
The recession-scarred Spanish labour market passed a milestone on Tuesday as employment showed its first annual rise since the start of the financial crisis in 2008.
Workers affiliated to the social security system rose to 16.2m in February, more than 60,000 than in the same month last year, according to the latest statistics from Spain’s labour ministry.
In seasonally adjusted terms, unemployment fell by 55,000, the largest February drop since records began. Registered unemployment stands at 4.81m, down from a peak of more than 5m in February last year.
INFLATION WATCH
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Brazilian Drought Jolts Commodities’ Prices Brazil’s worst drought in decades is decimating crops but breathing new life into battered commodity markets.
It hardly has rained in some of the South American country’s top farming regions since the start of the year, a period when precipitation is usually the heaviest. Traders, analysts and government forecasters who were calling for record harvests in coffee, sugar and soybeans as recently as December are cutting production estimates, triggering a spike in futures prices that may translate into higher costs for consumers later in the year.
Futures prices for the arabica coffee variety are up 67% since the start of the year. Raw-sugar prices have risen 8%. Soybeans, which have been affected by drought in some areas and too much rain in others, also are up 8%. (…)
Brazil’s bad weather has put an end to forecasts of several more years of record output and global surpluses in the coffee and sugar markets. Brazil is the source of about one-third of the world’s annual coffee crop, more than one-fifth of the sugar output, and about one-third of soybean output. (…)
Some experts say the drought in Brazil is likely to have ripple effects beyond the commodity markets directly affected. Ethanol refiners, which turn sugar cane into fuel, are predicting higher prices later this year, while chicken farmers say they will need to pass along rising grain costs to consumers.
(…) Wheat futures climbed to their highest level since early December while corn hit a fresh five-month high Tuesday on concerns that exports from Ukraine and Russia could be disrupted or affected by possible economic sanctions.
There are no indications of grain purchases shifting from the region due to buyers looking to other more stable suppliers, said Joseph Glauber, the U.S. Department of Agriculture’s chief economist.(…)
“The short answer is it’s too speculative,” he said. “I don’t like to second guess markets typically. We’ll evaluate this when we do our own forecasts. But right now I think it’s way too early to say anything about how much exports will be affected.” (…)
The USDA, before the crisis erupted, forecast that Ukraine will be the world’s fifth-biggest exporter of wheat by volume this year and the third-largest shipper of corn. It sells much of its grain to Egypt, the world’s largest importer of wheat, and to other Middle Eastern countries and Africa, with about 10% of its exports normally passing through Crimea, where military tensions are running high. (…)
(…) Reservoirs in the south around Los Angeles are brimming, groundwater basins remain comfortably stocked and recycling and conservation programs have freed up abundant reserves. The region’s water supplies are in such good shape that, so far, most local water districts are merely asking residents to conserve.
Much of Northern California, by contrast, is in a state of emergency: eight mostly rural communities face possible drinking-water shortages; rationing has been imposed in some Sacramento-area communities that depend on Folsom Lake, which has shriveled to just 33% of its capacity as of March 2; and prime farmland is being left fallow in the Central Valley, where many growers have been told they will get no new water shipments for irrigation.
The impact of the drought reverberates beyond the state’s borders. Because California boasts a bigger agricultural sector than any other state, the drought could lead to higher produce prices nationally. As a hedge if conditions don’t improve, the California Department of Water Resources on Jan. 31 said it would for the first time ever halt distribution of state supplies this year to 25 million urban customers and nearly a million acres of agricultural land.
While the state is still in a drought emergency, some relief has arrived. The first significant statewide storms in months drenched California last week, following storms that made a small dent in the northern part of the state in mid-February. (…)
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Oil prices: the world is flat Spending plans are still rising, even if revenues are not
A flat world sounds like something from the dark ages. Indeed, a world of flat oil prices could, for some, be a very unpleasant place. The lack of upward movement has already had an impact on the behaviour of important oil-producing nations such as Saudi Arabia, Qatar, Kuwait, UAE, Oman and Bahrain. These nations have slowed the pace of budgetary expansion from a regional average of 14 per cent growth last year to less than 3 per cent this year.
A report by Moody’s calculates the Brent crude oil price required to generate the revenue needed to cover spending plans (the break-even price). Since 2008 spending has more than kept pace with a doubling oil price. And those spending plans are still rising, even if the oil price is not. The UN forecasts that the labour force in the region will increase at 10 per cent annually until 2020. Investment in job creation is crucial. Substantial spending cuts will be hard to push through. For example, the break-even price for Oman is $100; for Bahrain it is $130. Oil is trading at $109.
If oil prices and regional government revenues were suddenly to drop, most of the Gulf nations could fall back on their sovereign wealth funds. Not Oman. Its SWF amounts to only two years of spending. In Bahrain oil accounts for only a quarter of its GDP but it is 87 per cent of revenues. It is the only Gulf economy running a budget deficit, as Bank of America points out. Since 2008 its debt to GDP ratio has more than doubled, to 61 per cent. (…)
CANADIAN HOUSING
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Why Poloz will wait until after spring housing market to rethink rates
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Toronto home prices jump nearly 9%
(…) “Essentially the BoC would want to test its view – and everyone else’s by now – that the pick-up in housing market activity last spring and summer was temporary and came at the expense of future sales,” he added.
“That’s because people with 90- to 120-day mortgage rate commitments that dated back to last spring, before Bernanke started taper talk, feared rising mortgage rates and were more likely to purchase before rates rose further.” (…)
“Sales have fallen over recent months but the key test is the spring market when volumes normally take off,” said Mr. Holt.
“So in other words, last summer may have just been a fairly standard short-term pick up on a correcting path in a market still characterized by record highs across every housing and household finance variable just as cyclical supports wane, including soft trend job growth and continued mortgage rule tightening.” (…)
Sales of existing homes in the Greater Toronto Area nudged up 2.1 per cent in February compared to a year earlier, while prices continued to climb.
The average selling price over the city’s Multiple Listing Service last month was $553,193, an increase of 8.6 per cent from a year earlier.
The MLS Home Price Index, which seeks to create a more apples-to-apples comparison of prices over time by accounting for changes in the type and location of home that are selling, was up 7.3 per cent.