China takes a cautious approach to its economy in 2023
BEIJING — China’s leaders struck a cautious tone about the outlook for the country’s economic rebound, after ending most Covid restrictions on business activity late last year.
Beijing announced Sunday a target of “around 5%” growth in gross domestic product for 2023, with only a modest increase in fiscal support.
“The government’s conservative growth target of 5% for 2023 recognizes that the pickup in China’s growth continues to face headwinds,” Martin Petch, vice president and senior credit officer, Moody’s Investors Service, said in a note. “These include the impact of slower global growth on China’s exports and risks associated with the property sector and local government debt.”
“The government’s only mild expansion in fiscal support and more targeted monetary measures indicate that long-term issues including constraining leverage and financial stability remain important elements of the long-term policy mix,” Petch said.
There are still quite a few factors restraining the recovery and growth of consumption … Resuming growth in real estate investment is an uphill battle.National Development and Reform Commission report
Premier Li Keqiang’s government work report delivered Sunday pointed out growing uncertainties in the international environment. A separate report from the economic planning agency — the National Development and Reform Commission (NDRC) — went into grimmer detail about challenges domestically.
“There are still quite a few factors restraining the recovery and growth of consumption,” the report said. “Resuming growth in real estate investment is an uphill battle.”
“Some local governments are finding economic recovery difficult and are facing prominent fiscal imbalances,” the report said. “Debt risks from local governments’ financing platforms need to be addressed immediately.”
Consumption is key
Consumption can become the primary driver of economic growth this year, Li Chunlin, deputy director at the NDRC, told reporters Monday.
He added the commission has many tools to boost consumer spending.
GDP only grew by 3% last year, well below the official target, as Covid controls and the real estate slump dragged down growth. Retail sales fell by 0.2% in 2022.
The impact from the pandemic has weakened, and recovery in retail sales alone can drive growth, said Zong Liang, chief researcher at the Bank of China.
Overall, while there’s a need for some increase in fiscal support, it’s important not to “blindly” expand such support, he said, noting that leaves room for future policy moves. That’s according to a CNBC translation of his Mandarin-language remarks.
Retail sales rebounded by 12.5% in 2021 after a drop in 2020. GDP jumped by 8.1% in 2021.
This year, pressure on the economy has significantly declined, and the economy can grow off a low base, said Xu Hongcai, deputy director of the Economics Policy Commission at the China Association of Policy Science. “The key is to improve the quality of growth.”
An overall recovery in the economy can help fiscal revenues grow, and boost demand for workers, he said. But he pointed out that “this year, the biggest pressure is on overseas trade.”
Many economists expect China’s exports to, at best, barely grow this year. That’s due to a drop in demand for Chinese goods as a result of slowing U.S. and European economies.
A ‘fiscal buffer’
China announced Sunday its deficit-to-GDP ratio is expected to increase to 3% from 2.8% last year. The country also increased an annual quota of special-purpose bonds by 150 billion yuan to 3.8 trillion yuan, or about $551.12 billion.
The measures are not aggressive, serving more as a “fiscal buffer,” said Susan Chu, senior director at S&P Global Ratings.
“Because China is not completely back to a consumption-driven [economy],” she said. “There’s a lot of external challenges, property slowdown.”
US revises down last quarter's economic growth to 2.6% rate – ABC News
WASHINGTON — The U.S. economy maintained its resilience from October through December despite rising interest rates, growing at a 2.6% annual pace, the government said Thursday in a slight downgrade from its previous estimate. But consumer spending, which drives most of the economy’s growth, was revised sharply down.
The government had previously estimated that the economy expanded at a 2.7% annual rate last quarter.
The rise in the gross domestic product — the economy’s total output of goods and services — for the October-December quarter was down from the 3.2% growth rate from July through September. For all of 2022, the U.S. economy expanded 2.1%, down significantly from a robust 5.9% in 2021.
The report suggested that the economy was losing momentum at the end of 2022.
Consumer spending rose at a 1% annual rate last quarter, downgraded from a 1.4% increase in the government’s previous estimate. It was the weakest quarterly gain in consumer spending since COVID-19 slammed the economy in the spring of 2020. Spending on physical goods, like appliances and furniture, which had initially surged as the economy rebounded from the pandemic recession, fell for a fourth straight quarter.
More than half of last quarter’s growth came from businesses restocking their inventories, not an indication of underlying economic strength.
Most economists say they think growth is slowing sharply in the current January-March quarter, in part because the Federal Reserve has steadily raised interest rates in its drive to curb inflation.
The resulting surge in borrowing costs has walloped the housing industry and made it more expensive for consumers and businesses to spend and invest in major purchases. As a consequence, the economy is widely expected to slide into a recession later this year.
The central bank has raised its benchmark interest rate nine times over the past year. The Fed’s policymakers are betting that they can stick a so-called soft landing — slowing growth just enough to tame inflation without tipping the world’s biggest economy into recession.
Yet as higher loan costs spread through the economy, analysts are generally skeptical that the United States can avoid a downturn. The main point of debate is whether a recession will prove mild, with only minor damage to hiring and growth, or severe, with waves of layoffs.
The financial conditions that led to the collapse of Silicon Valley Bank on March 10 and Signature Bank two days later — the second- and third-biggest bank failures in U.S. history — are also expected to slow the economy. Banks are likely to impose stricter conditions on loans, which help fuel economic growth, to conserve cash to meet withdrawals from jittery depositors.
“The economy ended 2022 with marginally less momentum,” Oren Klachkin and Ryan Sweet of Oxford Economics wrote in a research note. ”Looking ahead, the economy will face the full brunt of tighter credit conditions and Fed policy this year, and inflation is set to stay above its historical trend.”
They added: “We expect a recession to hit in the second half of 2023.”
In the meantime, the job market remains robust and has exerted upward pressure on wages, which feed into inflation. The pace of hiring is still healthy, and the unemployment rate is near a half-century low. The confidence and spending of consumers remain relatively solid.
Thursday’s report from the Commerce Department was its third and final estimate of GDP for the fourth quarter of 2022. On April 27, the department will issue its initial estimate of growth in the current first quarter. Forecasters surveyed by the data firm FactSet have estimated that growth in the January-March quarter is decelerating to a 1.4% annual rate.
Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 – Bloomberg
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Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 Bloomberg
Anomalies abound in today's economy. Can artificial intelligence know what's going on? – The Globe and Mail
All the fuss today is about machine learning and ChatGPT. The algorithms associated with them work well if the future is similar to the past. But what if we are at an inflection point in economic and political conditions and the future is different from the past? Will record profit margins, inflated asset prices and low inflation and interest rates of the past 30 years be an accurate reflection of the future? Is this time different?
Maybe we’re already there. Things do not seem to make sense anymore. Have you noticed that economic indicators seem to have stopped working as well and as predictably as they have in the past?
Here are some examples of the puzzling behaviour of economic statistics of recent months.
An inverted yield curve has historically been a good indicator of recessions. For several months now the yield curve has been inverted and yet the U.S. economy has been adding millions of jobs, leading to an historic low unemployment rate. Employment is booming while the economy at large is not.
Consumer sentiment, as reflected in the University of Michigan surveys, and consumer spending have tended historically to move together. But this time around, while consumer sentiment took a nosedive, consumer spending and credit card balances keep growing, reaching record highs.
Construction employment and homebuilder stocks are rising while housing permits and housing starts are falling. Normally, homebuilder stock prices would reflect the collective wisdom of financial markets about housing activity. Not this time.
Bond markets are expecting inflation to recede to the Fed’s target rate of 2 per cent. In this case, the real interest rate, implicit in the 10-year treasuries yield of between 3.5-4 per cent, is 1.5-2 per cent, which is close to historical averages. But prior to the Silicon Valley Bank debacle, some surveys pegged expected inflation to about 3 per cent going forward. Assuming the real rate is the same, this implied a 10-year treasuries yield of between 4.5-5 per cent. Either the bond market was out of line or forecasters’ inflation models do not work as well as in the past.
And oil prices are around US$70 a barrel despite the recent banking crisis and at a time when the economy is slowing down and believed to be entering a recession. Based on past experience at this point in the business cycle oil prices should be at US$50 or less. But they are not. Which begs the question: What will happen to oil prices when the economy enters a growth phase, especially with the opening of China after the COVID-19 lockups?
And the list of puzzling contradictions goes on. Having said that, someone may argue that the labour statistics, for example, are a lagging indicator and show where the economy was, not where it is going. While this is true, the magnitude of divergence between labour statistics and economic activity is so much higher than they’ve been historically. That makes one wonder what is going on.
It could be that many of these puzzling statistics are the result of “survey fatigue,” as Bloomberg Businessweek calls it. The publication reports that there has been a decline in response rates for many surveys government agencies use to collect economic data.
For example, employer response to the Current Employment Statistics survey, according to the publication, which collects payroll and wage data each month, has declined to under 45 per cent by September, 2022, from about 60 per cent at the end of 2019. The issue here is the non-response bias: that people who are not responding to the survey are systematically different from those who do, and this skews results. Could weakening trust in institutions and governments be behind the decline in response rates in recent years? If this is the case, the problem is serious and difficult to reverse or eliminate.
As a result, machine learning algorithms that need massive and good quality data about the past and assume that the future will look pretty much like the past may not work. Then what? Should we re-examine our old models? Or will human intervention always be required? Machine learning will not be able to replace investor insight and “between the lines” reading of nuanced economic numbers.
George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Ivey Business School, University of Western Ontario.
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