This week we look at some particularly strong second quarter GDP numbers out from emerging markets Brazil and India, as well as one lucky developed market, Australia. Then we review the PMI results from the two biggest economies; China and the US.
1. Brazil GDP
The Brazilian economy saw further signs of strength in Q2, reporting 8.8% growth year on year, compared to estimates of 7.9% and a similarly strong 9% in Q1. But with unemployment at record lows, there have been increasing concerns about overheating; especially going into next year. The Banco Central do Brasil has already increased the selic rate a few times this year to 10.75% as well as raising the required reserve ratios. The government expects the economy to grow at least 7% this year. Asset bubbles and overheating aside; it's clear where the growth is coming from in the recovery from the post GFC recession.
2. India GDP
Another one of the BRIC economies to report on Q2 GDP this week was India, who also reported 8.8% growth year on year; compared to 8.6% in Q1. In spite of concerns about data integrity around a revision of the demand component to 10% from 3.7% (with no change in the headline 8.8% figure). The strong points were manufacturing (up 12.4%), services (up 9.7%) and construction (up 8.9%). In terms of the outlook, the monsoon season has been relatively normal so far (a key determinant of output from the agricultural sector - and of course food prices), there may also be potential benefits from helping Pakistan rebuild after the floods. But as with Brazil, with great growth comes the potential for great inflation; and the RBI has already lifted rates and reserve ratios this year.
3. Australia GDP
Australia saw further strength in its economy in Q2 this year, with the economy growing 1.2% q/q vs consensus 0.9% and 3.3% y/y vs consensus estimates for 2.8% growth. The pick up in growth was driven by a 5.6% rise in export volumes, largely due to mining exports. The consensus view on the outlook for the Australian economy is increasingly for an investment boom, with the RBA being the most aggressive of the G20 nations in raising interest rates (which now sit at 4.50%). But of course the outlook for interest rates and the Australian economy will be very much dependent on the global economy; particularly the EU and US, where concerns peaked around the Greek debt situation and potential for a US economic double-dip.
4. China PMI
China reported improvement in the manufacturing sector during August, with the official CFLP PMI rising to 51.7 from 51.2 (consensus 51.5), and the HSBC/Markit PMI rising to 51.9 from 49.4. The data point to the possibility that the recent slowdown is only a temporary one, and with the government having recently tightening lending conditions, there is plenty of room to maneuver if additional stimulus is required. Also out this week was the HSBC/Markit services sector PMI, which rose to 57.6 from 56.3 (the services sector accounted for 43.4% of China's output last year). So for now it seems the outlook is relatively positive; confirming the growing economic clout of the so-called BRIC economies. But as with the results we saw earlier (Brazil, and India) the threat of a resurgence in inflation is still a credible threat in spite of policy tightening.
5. US PMI
The PMI results for the US were also out this week and also showed an upwards blip; rising to 56.3 from 55.5, against consensus 53. However much of the lift in the main index was due to more lagging indicators such as production and employment; new orders dropped slightly, and prices rose, with exports falling and imports rising. The non-manufacturing index was also out, which fell to 51.5 from 54.3 in July, below consensus 53. The new orders index fell 4.3 points, as did export orders, production, and employment. So not such a great outcome. Also out this week was the payrolls data, showing an expansion in private payrolls, but a contraction in overall nonfarm payrolls, wages rose slightly. The strength in private payrolls is promising, but the numbers are still not great, so again, for the US it's the muddle ages.
We saw a continuation of the strengthening rebound of the Brazilian and Indian economies, confirming views on the global economy being driven by strength in emerging markets. We also saw continued strength in the Australian economy, which is set to continue its mining boom driven surge; but as with the strong emerging markets, inflation is a growing threat. The results are largely consistent with the idea of a 3-tiered economic recovery.
In China we saw improvement in both of the manufacturing PMI data, with some strength in new orders, and strength also showing through in the non-manufacturing sector. The data point to the possibility of the recent slowdown being temporary, and lines up with the results from the other big emerging markets, with the theme being strong growth - but potential for overheating.
Finally we saw some positives, but nothing particularly great in the US data this week. Aside from the promise of further stimulus measures coming next week, the scenario seems to be the muddle ages of the recovery. But one question on the US economic outlook front will be to what extent it may eventually gain from the growing strength in the large emerging market economies like India, China, and Brazil?
1. Trading Economics www.tradingeconomics.com
2. Trading Economics www.tradingeconomics.com
3. Australian Bureau of Statistics www.abs.gov.au
4. Yahoo Finance finance.yahoo.com & CFLP www.chinawuliu.com.cn & Markit/HSBC www.markiteconomics.com
5. Yahoo Finance finance.yahoo.com & Institute for Supply Management www.ism.ws
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