International Economic Week In Review: Is The Long Period Of Deflation Over?

|
Includes: ADRU, AUSE, CHN, CN, CXSE, DBAU, DBEU, DBEZ, DBJP, DBUK, DEWJ, DEZU, DXJ, DXPS, EEA, EPV, EURL, EWA, EWC, EWJ, EWU, EWV, EZJ, EZU, FAUS, FCA, FCAN, FEEU, FEP, FEU, FEUZ, FEZ, FIEE, FIEU, FJP, FKU, FXI, FXJP, FXP, GCH, GSEU, GSJY, GXC, HAUD, HEDJ, HEWC, HEWJ, HEWU, HEZU, HFEZ, HFXE, HFXJ, HGEU, HGJP, HJPX, IAF, IEUR, IEV, JEQ, JFC, JPN, JPNH, JPNL, JPXN, MCHI, PGJ, PTEU, QAUS, QCAN, QGBR, RFEU, SBEU, TDF, UPV, VGK, XPP, YANG, YAO, YINN, YXI
by: Hale Stewart

By Hale Stewart

After years of discussing the possibility of developed world deflation, inflation might be accelerating, relatively speaking. The latest reading of Chinese producer prices was positive for the first time in three years. Due to China's position as the world's manufacturer, this could eventually seep into other developed economies such as the EU and US. Thanks to a spike in restaurant prices, UK CPI increased 1% Y/Y, which compared to .6% the previous 2 months. And core US CPI was 2.2% in the latest release. These are hardly alarming figures. But collectively they may indicate that deflation is slowing giving way to inflation.

Recent data from China have all but eliminated talk of this BRIC member exporting recent weakness. GDP grew 6.7% in the 1st, 2nd and 3rd quarter while fixed asset investment increased 8.2% in the first 3 quarters of 2016. Retail sales rose 10.4% Y/Y in the first three quarters while real estate investment was up 5.8%. But both the NY Times and FT ran stories this week warning of a potentially overheating Chinese real estate market.

Japanese news was light. Industrial production increased 1.3% M/M and 4.5% Y/Y. But this is only 1 of 4 Y/Y increases since January 2015, which illustrates how weak the Japanese economy is.

UK news continues to blunt predictions of a post-Brexit recession. Unemployment is still 4.9% and the 74.5% employment/population rate is the highest level since 1971. Hours worked is increasing at a slower rate, potentially foreshadowing future weakness. While retail sales increased 0% M/M, a sharp drop in clothing sales (down 5.4%) was the primary reason; all other components rose. And the three-month rolling average (which removes month-to-month variability) was a strong 5.4%. CPI, however, was surprisingly high, printing at 1%, the largest increase since November 2014. While food prices were a primary contributor to the rise, energy also added to the uptick.

The Bank of Canada maintained rates at .5%. They also issued their latest Monetary Policy Report, which highlighted the weak situation for Canadian trade. While the overall export level has returned to pre-recession levels, it contracted for the first 5 months of 2016. It has recently strengthened. More concerning, a survey of Canadian companies reported that executives believe structural rather than cyclical factors are the predominant cause for this weakness, which is in line with the global trade slowdown. There were two other Canadian economic releases this week. Y/Y inflation was 1.3%, giving the Bank of Canada plenty of policy leeway, while retail sales edged lower by .1%, continuing their near year-long weak trend.

The ECB maintained their current interest rate policy, offering the following assessment of the EU economy:

Real GDP in the euro area increased by 0.3%, quarter on quarter, in the second quarter of 2016, after 0.5% in the first quarter. The latest data and survey results point to continued growth in the third quarter of 2016, at around the same pace as in the second quarter. Looking further ahead, we expect the economic expansion to proceed at a moderate but steady pace. Domestic demand should be supported by the pass-through of our monetary policy measures to the real economy. Favourable financing conditions and improvements in corporate profitability continue to promote a recovery in investment. Moreover, still relatively low oil prices and sustained employment gains, which are also benefiting from past structural reforms, provide additional support for households' real disposable income and private consumption. In addition, the fiscal stance in the euro area will be broadly neutral in 2017. However, the economic recovery in the euro area is expected to be dampened by still subdued foreign demand, the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms. The risks to the euro area growth outlook remain tilted to the downside and relate mainly to the external environment.

This assessment is very similar in tone to the last few ECB statements on their economy. Other data was consistent with weak overall growth. Inflation is a still low .4% overall/.8% core. While some analysts noted this was one of the highest readings in the last 1½ years, that's relative assessment; the region's inflation level is still consistently low. Construction spending dropped .9%, continuing this data series 3-year long weakness. But the current account was a positive 13.5 euros.

The Reserve Bank of Australia released their latest meeting minutes, where the bank observed a slightly slower domestic economy. The best news was the year-over-year pick-up in mining activity; non-mining business was growing at trend. While dwelling investment was strong, the existing home market was slightly weaker. Labor market slack was slightly higher, which may be responsible for the recent spate of slightly weaker household consumption data. Finally, the unemployment rate declined .1% to 5.6%.

This week's news was hopeful, especially in light of recent pronouncements of concern from the IMF, OECD and World Bank. The best news was in the increase in inflation, which may indicate the long period of deflation is over. It appears China has stabilized at lower growth levels, meaning they won't export a hard landing. The UK continues to dodge a post-Brexit bullet while the EU maintained its modest growth rate. But Canada and Japan are still a concern.

Hale Stewart, XE.com