The slowing of Chinese growth through 2014 was an obvious call but the rate of expansion in the world’s second largest economy slowed last year to its lowest level since 1990. 7.4% is the lowest calendar year period of growth since the sanctions imposed by the international community in the aftermath of the Tiananmen Square atrocity and sits below the communist party’s growth target – this year that sat at 7.5% – for the first time since 1998.
The growth picture in China has been attacked from all sides. Export growth has slipped as overseas demand has fallen amid deflationary price pressures. Investment has fallen as haven and developed markets have stolen cash from emerging market assets, and a move away from credit driven spending has pressurised the housing market. The Chinese economy has missed its ‘hard landing’ but stands in a little bit better shape than it did six months ago.
Last week the World Bank lowered its growth forecast for China this year to 7.1% from the 7.2% it projected in October and its estimate of 7.5%. We can expect further stimulus measures from the Chinese government and/or the People’s Bank of China with a possible cut to the reserve requirement ratio being seen in January, ahead of the Chinese New Year holiday.
An article in the Wall Street Journal overnight has seen the US dollar strengthen out of yesterday’s Martin Luther King's Day holiday. According to the Jon Hilsenrath, an influential US monetary policy journalist, Federal Reserve officials are on track to raise rates this year despite falls in longer-term interest rates and the falls in inflation, dragged lower by the price of oil.
Recent communications from the Federal Reserve have stated a belief that the recent falls in inflation have been “transitory” and that they will be looked through when making policy. I think this tactic is correct with CPI at current levels but, as we have stated when viewing the UK economy, should core prices deteriorate below the 1% level then we would have concerns about a tightening monetary policy.
Dollar has also strengthened as the European single currency has been sold once again by traders looking for a strong announcement from the European Central Bank on Thursday. Francois Hollande, the French President, appeared to give the game away yesterday by telling a group of French diplomats that “on Thursday, the ECB will take the decision to buy sovereign debt, which will provide significant liquidity to the European economy and create a movement that is favourable to growth”. As we highlighted yesterday however, it is not the plan to buy assets that is important but what assets are bought and in what size.
Recent thoughts around the Greek elections have also seen some euro weakness. The overall belief is that the left-leaning Syriza party will win. If that is the case, then – as is the case in Greek electoral law – they will be awarded 50 extra seats for winning the popular vote. While the polls suggest that this will not give the Syriza party an overall majority, the prospects for a left-leaning government – a partnership with PASOK or the new KIDISO party for example – are very possible.
The largest movers overnight have been the commodity currencies as focus has moved back on to the moves in minerals, miners and oil producers. Falls in copper and iron ore prices are the key to a lower Australian dollar which must also deal with the prospects of a struggling China. USD/CAD is back towards the 1.20 level as oil prices slipped once again yesterday night while NZD is lower on the session as we wait on the latest milk auction from the Fonterra (ASX:FSF) milk cooperative.
