China is slowing says Westpac Senior International Economist
Chinese manufacturing shows signs of strain
The flash estimate of the November HSBC manufacturing PMI,
released Wednesday, was very weak.
This survey highlights that the industrial sector is in a concerted
slowdown phase that is more than a ‘soft patch’. The sharp fall of
the headline index was concentrated in output and new orders,
which declined by 4.7pts and 6.7pts respectively to deeply
contractionary levels. Both input and output prices collapsed, each
sub-index losing approximately 10pts. While this survey does not
quite evoke a unidirectional unravelling – if inventories had risen
sharply in addition to the decline in output and orders, it might
justify that description – it certainly opens up a lively debate on the
short term GDP profile for Australia’s major trading partner.
Most forecasters seem disinclined to push their quarterly numbers
below 8% even where they have quite a pessimistic narrative.
But to our minds there is little hope that year-ended GDP growth
will retain an 8-handle in the March quarter of 2012. The weak
state of manufacturing as described by the PMI also raises the
possibility that the 8% threshold may be under threat in the current
quarter. The bar is not that high in Q4 – anything better than a 7¾%
annualised pulse would produce 8.0%.
For Q1 though (depending on the starting point of course) the
required ‘standard’ to achieve an outcome as high as 8.0% jumps
into double digits. And that would be a remarkable turnaround given
the presumed weakness of external demand through this period; the
fact that the lagged policy states most relevant to this period were
unambiguously restrictive; and the fact that the housing market is
looking increasingly stressed, thereby putting the contribution to
growth from the real estate construction cycle at risk.
Selective policy easing is underway, as we have been expecting,
and the weak outcomes for the price sub-indices in the PMI are an
obvious signal that the inflation story is not going to be a restraint
on policy action going forward. Unfortunately though, such are the
lags between monetary policy changes and real activity, the earliest
that we can expect the observed easing policies to begin positively
influencing growth is late in the June quarter of 2012. The path
between today and the middle of next year will be a rocky one.
Huw McKay, Senior International Economist
Australia: lumpy project activity to boost Q3 GDP
The Construction Work Done survey, published Wednesday, revealed
a sharp rise in the value of work for the September quarter.
Construction activity leapt by 12.5% to $47.7bn, an increase of
$5.3bn on the June quarter. This outcome was well in excess of
expectations and will provide a significant boost to Q3 GDP.
However, this does not fundamentally alter our view of the Australian
economy. The sharp rise was entirely driven by a phenomenal spike
in private infrastructure work. Infrastructure work in the private
sector increased by $5.4bn, up 36.1%. We had expected an increase
of 5%. No surprise that strength was concentrated in the mining
state of Western Australia. Total infrastructure work in the state
increased by $4.1bn, a rise of 63%.
So what are we to make of this? The very sizeable pipeline of
project work outstanding, which is $109bn nationally and $66bn for
Western Australia, points to considerable upside for infrastructure
investment, a prospect we have in our forecasts. The speed with
which this work can be completed will, however, be limited by
capacity constraints. The Q3 rise in WA infrastructure work of
$4.1bn is an outlier. By way of comparison, the total increase
over the previous six quarters was less than $1bn and the largest
quarterly rise prior to this was $1.2bn, in June 2005. We suspect the
importation of a large one-off “bolt-on” structure contributed to this
Q3 spike. Accordingly, we anticipate a corrective pull-back in Q4.
It was also notable from the Construction Work Done survey, and as
we expected, that conditions were mixed outside of infrastructure.
Indeed, activity ex-infrastructure weakened a little, declining by
$0.1bn, -0.3%.
Private residential building activity was flat. Near-term, we expect
some weakening, given declines in dwelling approvals. The RBA’s
November interest rate cut and the prospect of further cuts will
provide some support. Public construction weakened in the quarter,
down -3.9%, as the Federal Government’s fiscal stimulus package
continued to wind down. Private non-residential building activity
experienced a bounce, up 7.8%, but remains at relatively low levels.
Approvals, while off their lows, are subdued and recent global jitters
are likely to delay any further gains.
Taking all these factors into account, we have upgraded our Q3 GDP
forecast to 1.3%, from 0.2%, but lowered our Q4 GDP forecast to
0.4% from 0.6%. Our forecasts for year average GDP growth are now:
1.7% for 2011 (up from 1.2%) and 3.0% for 2012 (up from 2.7%).
The ABS will publish the Q3 national accounts on Wednesday 7
December. The next quarterly partial indicator to be released is the
CAPEX survey, on Wednesday 30 November.
Andrew Hanlan, Senior Economist
Global risks increase as China slows
