The latest batch of data points coming out of the global economy are a mixed bag. Some point to continued robust retail sales in the U.S. but other points show weakness in expected capital expenditure and hiring globally, while others show credit problems in China. Let’s start in the U.S. where Black Friday has started early.
United States
The second estimate for US GDP in Q3 2014 pushed up the estimate from 3.5% to 3.9%. Coming on the heels of a 4.6% quarter, that’s a remarkable six month stretch, and underlines the relative strength in the US. I think this sets up Q4 retail numbers nicely.
A number of big retailers including Amazon, Target, and Walmart have launched “pre-Black Friday sales”. If you go to sites like Gizmodo or Lifehacker or Engadget, there are a huge number of sales they are tracking right now in the lead up to Black Friday. This is nothing like last year. IBM Digital Analytics says that actual Internet retail sales are up 18.7% over last year. Mobile traffic and sales is up even higher, with mobile now accounting for nearly half of traffic. As usual, Apple users are the ones doing the big purchases:
- Average Order Value: Apple iOS: $111.55 per order;Google Android: $86.56 (28.9 percent less)
- Online Traffic: Apple iOS traffic 33 percent of total online traffic; Android traffic 15.3 percent of total online traffic (less than half)
- Online Sales: Apple iOS sales: 20.8 percent of total online sales; Google Android: 5.4 percent of total online sales (less than one-third).
So, not only are iOS users actually buying more per shopping trip, they are also using the web much more. Apple and iOS is still where the money is in the U.S as far as mobile goes. But according to IBM, desktop PCs drove 51.2% of all online traffic, and 73.4% of all online sales because there was a 17% higher spend per transaction on the desktop. Average orders are slightly down from last year at $112.86, which is 5.4% less than in 2013. Overall, these are good numbers and they support the notion that we are going to have a good retail sales quarter.
Earlier this month Bloomberg data pointed to consumer confidence at a six-year high, while retail sales for October were up 0.5% m-o-m due in part to the boost from declining oil prices. That puts them up 4.1% y-o-y and 5.1% excluding gasoline/petrol purchases. I have seen estimates for a 4% increase in retail sales compared to last year for Q4.
Europe
In Europe, where I am predicting the oil boost will be significant in 2015, the data are weaker right now. But the most recent data point of note was Germany’s Ifo Index survey which tracks German business sentiment and this was good.
You can see the data show sentiment declining steeply just as German GDP growth declined. Now, we are seeing a minute uptick that could presage better numbers for German GDP ahead. Ata a minimum the relentless decline in the numbers has been interrupted for at least one month.
In Europe as a whole though, the data have been poor. Last week, data showed eurozone consumer confidence fell in November, despite expectations for a rise. And the eurozone’s composite PMI came in at 51.4, the lowest in 16 months, with unexpectedly poor numbers from Germany. I see this as rear-view mirror stuff, however. And I believe Europe’s numbers will improve in 2015. Let’s see.
From a policy perspective, I am less sanguine than some. Bundesbank head Jens Weidmann was out yesterday with some hawkish commentary at the BIS. He basically said that monetary policy and fiscal policy only give a temporary boost and should not be relied upon excessively to deal with today’s problems. He also said he sees high legal hurdles for sovereign QE in Europe. In my view, this tells us that monetary policy in Europe will be less expansive than some would want as Draghi still has to mind the desires of the Bundesbank in conducting policy.
China
In China, things are not going according to plan. Despite the surprise rate cut and the expectations for more going forward, it could be that rate cuts actually restrict credit rather than add to it. Here’s how Caixin put it, relying on commentary from Zhong Zhengsheng, chief macroeconomic researcher at Guosen Securities (emphasis added):
The central bank cut its benchmark lending interest rates by 40 basis points to 5.6 percent for one-year loans on November 22. The benchmark rate for one-year term deposits was reduced by 25 basis points to 2.75 percent. Banks were also allowed to raise their deposit interest rates to 20 percent above the benchmark, compared with the previous ceiling of 10 percent.
Under the new policy, banks can raise their deposit interest rate to 3.3 percent, the same as before.
[…]
…While the rates on outstanding loans might fall because they are more directly linked with the benchmark, the rates on new loans might actually increase as banks seek to compensate for the shortfall in interest payments, [Zhong Zhengsheng] said.
This would cause higher financing costs for new borrowers and discourage new investments.
“The interest rate cuts this time are essentially using bank profits to subsidize companies and individuals that are already heavily in debt and they are not necessarily much of a help when it comes to additional financing,” Zhong wrote.
China International Capital Corp., an investment bank, also predicted that banks will suffer because of narrower interest rate spreads. The industry’s profit may stagnate or even slip in 2015 compared with this year, it said in a research report.
Wen Bin, chief researcher at China Minsheng Bank, said banks will face a challenge in pricing deposits and loans. Some of them will lose money because the gap between the lending and maximum deposit interest rates will narrow to only 2.3 percentage points, he said.
In the long term, whether social financing costs would fall hinges more on the conditions of local government debt and companies’ profitability than changes to the benchmark interest rates, said Guan Qingyou, senior analyst with Minsheng Securities.
So, we have to look to credit writedowns to see whether this is stimulative. And the writedowns are saying it is not stimulative. According to official statistics, non-performing loans at Chinese banks are now at the highest since 2005 at 766.9 billion yuan (HK$968 billion), through Q3 2014. We should expect these numbers to continue to increase, even while the indebted subsidy increases, re-allocating capital away from new enterprises and small and medium-sized business.
In fact, according to the Ministry of Industry and Information Technology, the cost of funding for small- and medium-sized businesses increased 17.5 percent in the first half of 2014. Some SMEs are paying 30 percent interest for loans. Bank of Communication chief economist Lian Ping estimates the average cost of capital for SMEs in Shanghai is 18 percent, according to Australia’s Business Spectator.
To me, this indicates growth in China should continue to slow despite the injections of liquidity and rate cuts by the central bank. And remember, a strong dollar is a big problem for the Chinese because of the currency wars. At some point we may see the Renminbi weaken against the dollar if grow continues to slow.
Global
The last data point comes from Markit. Global business confidence is now at a five-year low. And Markit has three big bullet points here:
- Activity expectations weaken among both manufacturers and service providers
- Hiring and investment plans at or near post – crisis lows
- Price expectations deteriorate further
In essence, Markit is saying businesses expect weak demand and are hiring less and spending less in capital investment as a result. And all of this is causing disinflation to continue our inexorable decline into deflation – very sobering stuff indeed.
Note the nuances here:
Of all major countries surveyed, UK compani es remained the most upbeat about the year ahead, despite expectations about future activity levels dropping to the lowest since June of last year in both manufacturing and services sectors.
However, the most striking development was the extent of the down turn in the US , where optimism hit a new survey low, with the service sector seeing a particularly dramatic decline.
Optimism in the US nevertheless remained more buoyant than seen in the Eurozone and Japan , the latter suffering from especially weak confidence relative to other major countries as optimism slipped to the lowest for two years.
Optimism fell in the Eurozone to the weakest since June of last year. Relatively buoyant levels of business confidence in Spain and Italy were nonetheless the lowest re corded since this time last year and the start of 2014 respectively. Confidence was far lower in Germany and especially France by comparison, with both ‘core’ countries seeing the lowest levels of optimism since June of last year.
Business expectations across the main emerging markets fell on average to the lowest seen in the survey’s five – year history, though trends varied by country. Russia saw the weakest optimism, with expectations for business activity in the year ahead diving to a new survey low. Confidence in China picked up slightly from the near – record low seen in the summer, though remained subdued compared to prior years. Optimism in India was meanwhile unchanged, though also remained weak by historical standards.
I would note separately that Andy Lees at Macro Strategy Partnership says that “Brazilian consumer confidence plunged to 95.3 in November from 101.5. It was the lowest reading since the height of the crisis in December 2008”. He also says companies in Brazil shed over 30,000 jobs in October. This speaks to the depth of the global growth slowdown, especially in emerging markets.
Conclusions
- I expect the US to have a good quarter on the retail front. But I expect the capital expenditure decline in the oil patch to have a negative impact on numbers, some of which will not be reflected in the data until revisions.
- Europe, while weak, will benefit from more disposable income for consumers and will bounce somewhat from the bottom, with Ireland, Spain and Germany showing noticeable upticks.
- EM will suffer because China’s stimulus will not be nearly enough to overcome the ill winds blowing from housing and souring loans, while the policy effect will skew capital to dead wood zombie companies as SMEs remained starved for capital.
- If all of this plays out as expected, oil prices are still at risk of falling further, perhaps to as low as $60 a barrel, at which point the oil dividend evaporates and the capital market volatility will be the defining element. What we want to see is oil at $75-80 a barrel and no lower. That would be the best case scenario for arresting the global growth slowdown.