Local investors had their eyes squarely fixed on the collapse in local shares yesterday, but no doubt one or two gave a glance to the latest data out of China and Japan.
China is our biggest export market, Japan is the second. The weak growth seen in both economies has helped undermine commodity prices and batter oil prices lower, in particular, as well as iron ore and coal.
Helping in all cases has been rising oversupply of these key commodities, and others.
Both China and Japan should get considerable benefit from lower oil prices – both there’s the downside – falling oil prices will intensify the deflationary pressures making their way through both economies.
More and more deflation is looming as the big challenge for countries like Japan, China, much of the Eurozone and even the US.
The news from Japan during the day would have not registered, but Moody’s decision last night to downgrade Japan’s credit standing to A1, the 5th highest credit rating – saw the yen plunge to new seven year lows.
Moody’s said its downgrade was based on an increasing belief that the Government’s aggressive policies to lift the economy out of its deflationary rut were not working.
The updates from China were not as dramatic as Moody’s move on Japan’s rating, but they underlined that the slide in Chinese manufacturing continues, and with it the continuing downward pressure on global oil prices.
The two start of month surveys of Chinese manufacturing confirmed that growth has stalled in the world’s biggest manufacturing sector.
All and all the news from China was close to what economists had been expecting, but that didn’t lessen the importance.
The reports add confirmation to why the Chinese authorities cut interest rates last month, and why they have been trying to soften the impact of the slowdown, especially intensifying price deflation for many businesses – something that the slide in oil prices will deepen in coming weeks.
The final HSBC/Markit China Manufacturing Purchasing Managers’ Index (PMI) edged down to 50.0 in November, a six-month low and right on the boom-bust level that separates growth from contraction on a monthly basis.
The reading was unchanged from the preliminary "flash" finding and down from a final 50.4 in October.
Output fell to 49.6, the worst reading since May, as companies cut production, according to HSBC/Markit yesterday.
"Total new business increased at a modest pace that was little-changed from October. However, November data indicated that foreign demand continued to soften, with the latest expansion of new export business the slowest since June,” HSBC/Markit said yesterday.
HSBC economist Hongbin Qu said in the statement yesterday the survey pointed to lost momentum in China’s manufacturing sector. He sees the government responding with further measures on top of the rate cuts to counteract the slowdown.
"Domestic demand expanded at a sluggish pace while new export order growth eased to a five-month low … We continue to expect further monetary and fiscal easing measures to offset downside risks to growth,” Hongbin Qu said.
The official Purchasing Managers’ Index (PMI) slipped to 50.3 in November from October’s 50.8, but still above the 50-point level that separates growth from contraction on a monthly basis.
But from Japan news that the surprise slide into recession in the September quarter might vanish when the second estimate is released early next week.
This is after new capital expenditure figures, released yesterday, suggested revisions will put third quarter economic growth in a more positive light.
The 5.5% year-on-year rise in capital expenditure over the third quarter reported followed a 3% annual increase in April-June.
That’s better than previously thought. Other data on consumer spending and factory output late last week suggest the economy is better than it was shown in the first GDP estimate.
Compared with the previous quarter, capital spending excluding software rose a seasonally adjusted 3.1% in the September quarter, against the 1.5% drop in April-June.
The first GDP report showed the economy contracted by 0.4% quarter on quarter, or an annual 1.6%, meaning the economy was back in recession for the 4th time since 2008.
In that first GDP estimate, capital expenditure shrank 0.2%, versus the median estimate for 0.9%.
A rise anywhere near 0.9% could push GDP back towards zero, and other more positive data could push it up to 0.1% growth.
Moody’s downgrade makes all this optimism moot – although it will help boost inflation, if the yen remains low.
