- Growth surprise emerging in US
- Echoed, against all the odds, in UK
- Germany shocks with weak retail and factory orders data. Eurozone too.
- China contradictory – weakness remains sectoral rather than systemic, whilst HK retail sales keep booming.
The first week's data
of the year underlined the possibility that 2012 would be ambushed by
a growth-shock from the US, for which bond and currency markets
remain completely unprepared. There were no negative shocks from the
US, but such big positive surprises from labour market that
economists and statisticians were left interrogating the seasonal
adjustment process for explanations. First the ADP count of changes
in employment during December came in at +325k, which was the
strongest monthly reading since at least 2002, and which was 123k
higher than the 1SD upper range of expectations. This reading was
completely unexpected, but the implications could be ignored because
the week also brought the Department of Labor's count in change in
non-farm payroll. Though less spectacular (+200k for non-farm, +212k
for private payrolls), these were still stronger than the range of
economists' expectations. This had a knock-on impact on the
unemployment ratio, which fell unexpectedly to 8.5%.
I've previously written
about how the fundamental ratios of household leverage had already
been largely normalized by the end of 2011, so continued spending was
now primarily hostage to confidence, which in turn meant the labour
market. With the powerful improvement in the US labour market, then,
one can expect a surge in both confidence and spending. This week we
got some evidence of surprises opening up on these fronts. First, the
RBC Consumer Outlook index reported the biggest monthly jump since
September 08 (rather worrying, that), and the best reading in the
Bloomberg Consumer Comfort index since July. And then there was a
completely unexpected 1.2% MoM rise in construction spending, with
residential spending up 1.8% MoM and non-residential up 0.9% MoM.
So far, economists,
commentators and policymakers have not factored in these positive
surprises from the US, nor their likely impact on fiscal sums. If
one looks at consensus forecasts for 2012, we're still stuck at GDP
growth of around 2.2% - unchanged since November, and actually still
slightly down from the 2.3% consensus expected for 2012 in October.
More surprising than
the emerging strength of the US, perhaps, is the strength of recent
data from the UK – the country which, let it not be forgotten, in
November chalked up consumer confidence worse even than the darkest
days of 2009! Confidence continues to be wretched - this week saw
the Lloyds Business Barometer reading plunge to its worst since 2009
– but indexes of economic activity bely this depression. On Monday
the Manufacturing PMI came in sharply better than expected (49.6), on
the back of the first rise in export orders for five months (Germany,
Eastern Europe, and China to thank for that). The next day, the
Construction PMI outstripped expectations, with civil engineering,
residential and commercial construction all expanding for the first
time in nine months. Finally on Thursday, the Services PMI, at 54,
gave the strongest reading for five months, based on strong readings
for activity and new business.
Britain certainly
believes its economy is well within the impact-zone of any Eurozone
implosion, but for now its trajectory is rather different, and
better, than it perceives.
Meanwhile, the Eurozone
delivered three sets of data showing end-demand beginning to buckle
worse than consensus was prepared to envisage. The first, and
probably more important, was the 0.9% MoM fall in German retail sales
in November. Since Germany is, by almost all counts, the one
industrial economy in the Eurozone which continues to grow, and where
unemployment ratios continue to fall, it is to Germany that we must
look for retail demand to be maintained. Well, it isn't: sales
excluding autos fell 0.9% MoM and rose only 0.8% YoY, whilst car
sales fell 3.9% MoM. With Germany's numbers shocking like this, it
was inevitable that retail sales figures for the Eurozone would shock
similarly. And they duly did, falling 0.8% MoM and 2.5% YoY. The only
positive outliers were Ireland (up 2% MoM) and Austria (up 0.5%).
End-demand in the Eurozone will not be rescued by Ireland and
Austria!
The third serious
Eurozone disappointment of the week again came from Germany, where
factory orders fell 4.98% MoM in November, giving back all the
unexpected strength experienced in October. The most alarming aspect
of these numbers was their composition: capital goods orders fell
6.5% MoM, whilst intermediates fell 2.9% and consumer goods fell 2%.
Even worse, the sharpest fall of all was for capital goods orders
from outside the Eurozone, which fell 13.1% MoM.
Directly contradictory
stuff from China, with the HSBC Services PMI for December unchanged
on the month, and modestly positive (52.5), whilst the official PMI
for the non-manufacturing sector recorded a sharp rebound (56) from
November's contractionary 49.7. Meanwhile, quarterly surveys of the
business climate and entrepreneur's confidence showed, respectively,
the worst readings sinc 1Q09 and 3Q09. In both cases, the most
depressed sectors were real estate (no surprise there) and
transport/communications – which I take to be a comment not only on
depressed shipping markets, but also the nationwide shortage of
diesel fuel. On the other hand, distributive trades (wholesale &
retail) and infocomm recorded virtually no downturn on either
business climate or confidence. More surprisingly, the construction
sector seems to be surviving far better than the real estate sector,
both in current business climate terms, and in confidence, too.
This granularity is
interesting, since it suggests so far that the real estate travails
induced by China's credit squeeze has not yet soured the entire
economy. Rather, it seems those woes have remained sectoral rather
than systemic at this point. If this can be maintained, China's
chances of avoiding a hard landing look good. Meanwhile, one can look
over to Hong Kong and find its retail sales still surprising on the
upside, rising 16.9% YoY in volume terms and 23.5% YoY in value terms
– both still more resilient than consensus expected.
