The Roundup
Until the Job is Done
Signs of the economic pain the US Central Bank warned of when it commenced its rate rising campaign started to appear in August. Monthly unemployment rose 0.3% to 3.8%, the highest reading in 18 months, new job numbers posted their third consecutive monthly print below 200,000, and wage growth remained subdued at 4.3%, versus 5.4% a year ago.
However, at the annual Economic Policy Symposium the Federal Reserve Chair warned of areas in the US economy that are still running hot. Output has been strong and above expectations, consumer spending remains robust, and the housing sector is picking back up – all trends that may undermine the progress made against inflation so far.
The Fed reaffirmed its commitment to bring inflation back down to their 2% target (it currently sits at 3.2%) and cautioned that further persistently strong growth may necessitate additional monetary tightening, something they’re prepared to do, to get the job done.
With interest rate rises still on the table for this year, the US dollar has appreciated against a number of currencies. The higher-for-longer stance has also sent US Treasury yields soaring, the 10-year is now at its highest level since 2007, and mortgage rates, influenced by rates on US government debt, have also lifted.
Evergrande 2.0?
In contrast to the US housing market, China’s property sector remains very fragile. Fresh troubles unfolded over the month as a major property developer struggled to pay its debts. Last-minute payments and extensions avoided a default, appeasing investors, while questions remain over its future obligations and the industry as a whole.
Additionally, exports of goods and services fell 14.5% in July from a year earlier as the cost-of-living weighs on trading partners, softening demand. With exports making up approximately 20% of economic activity and the property sector accounting for around a quarter, the outlook for China’s growth has dulled in recent months.
To boost output policymakers are targeting household spending, a challenge when Chinese household consumption has typically been one of the lowest in the world and a backdrop of a weak labour market - youth unemployment is around 21%. Any measures will therefore need to be very compelling to lift consumer spending enough to offset weakness elsewhere.
The month also saw a visit from the US Commerce Secretary, with aims of shoring up ties between the two major powers that have been drifting apart. Having previously been each other’s largest trade partner, the US and China are now trading more with their neighbours.
New Zealand reported a trade surplus of $2 billion dollars with China for the second quarter of the year. New Zealand goods, predominantly dairy and meat, continue to make up the bulk of exports, while service exports (travel) are yet to return to their pre-Covid levels. Chinese imports have generally been declining, with the exception of electric vehicles.
As international trade patterns look to shift from globalisation to regionalisation, this could spell bad news globally, potentially fuelling inflation and hampering growth for those countries caught in the crossfires. Might we be about to witness a reshaping of the world economic landscape?