China's Retail Outlook Dims After Mid-Year Shopping Festival Flop

Economic

Summary:

Retailers in China face a daunting near-term future after a disappointing mid-year online shopping festival that has also clouded the recovery prospects of the world's second-largest economy.

E-commerce sales declined for the first time during the so-called 618 festival that ended last week, reports said, reflecting the pressures building up on retailers who are already locked in a gruelling price war.

The festival, named after the June 18 founding date of e-commerce provider JD.com but embraced by all platforms, is China's second-biggest annual sales event after 'Singles Day' in November and is seen as a key indicator of household consumption.

The two events once showcased the rampant rise of Chinese consumerism, providing a reliable bump in sales for platforms and brands alike. The last time Alibaba reported Singles Day revenue, in 2021, sales hit $84.54 billion over the event's duration.

This year, 618 has instead proven just how hard it is to get consumers spending at all.

"Chinese spend has been basically focused on sales opportunities and coupons. If they're not spending during this (618 sale), when on earth are they going to consume?" said Alicia Garcia-Herrero, Asia Pacific chief economist at Natixis.

To be fair to the event, discounts have become available year-round since the pandemic, with retailers competitively offering them to woo belt-tightening consumers, thereby helping stunt sales growth during big shopping festivals.

Sales during the marquee Singles Day shopping bonanza last year grew just 2%.

While the discounting has helped slow the flow of consumers away from platforms such as JD.com and Alibaba-owned Tmall and Taobao to low-cost players such as Pinduoduo, it has not supercharged consumer spending - recent quarterly results showed revenues for Alibaba's domestic e-commerce arm rose by only 4%.

Investors also remain unconvinced, with Alibaba shares trading around 5% down this year and JD.com down over 3%.

But the bigger concern is weak consumer sentiment, which has remained stubbornly low since 2022. China's Retail Outlook Dims After Mid-Year Shopping Festival Flop_1

China's Retail Outlook Dims After Mid-Year Shopping Festival Flop_1

A new Bank of America's China consumer survey found that sentiment weakened further in June.

The share of respondents who plan to spend more over the next six months fell to 45% in June, compared to 55% in April. And only 31% of respondents are expecting an increase in income over the next six months, a fall of 10 percentage points from April.

'Everest commerce'

Josh Gardner, CEO of Kung Fu Data, which manages online stores for over a dozen global brands, said e-commerce in China is commonly referred to as "Everest commerce" for its enormous sales peaks around 618 and Singles Day.

But these peaks may become less pointy as sales periods lengthen and consumers lose interest, turning instead to everyday discounts offered, for example by livestream shopping on platforms such as ByteDance-owned Douyin, he said.

"I think what we're seeing this year is a shift away from full price retail altogether... It's more rational consumption and caution and looking for value," Gardner said.

Consumers in China have been reluctant to spend amid concerns about their personal wealth fuelled by a real estate slump, stunted wage growth and high youth unemployment, putting at risk China achieving its stated economic growth goal of "around 5%" this year.

But rather than stimulate consumption - as they once reliably did - festivals such as 618 might be working against a consumption rebound in a year like this in which everyone is focused on buying what they need at the lowest possible price.

Kang Li, a 45-year-old mother-of-one who works in sales in the southern city of Changsha, is among those who are turning more frugal and shunning purchases of non-essential items.

"(I bought) household essentials, and some clothes and shoes for my kid, plus my own skincare products," Kang said, referring to her 618 shopping this year.

"Basically, I stock up on these when shopping events like 618 come around so I don’t need to purchase them again for half a year,” when Singles Day rolls around, she added.

Jason Yu, greater China managing director of market research firm Kantar Worldpanel, warned that the coming months would be challenging for retailers as people bought what they needed during 618.

"This pantry loading behaviour is an overdraft of the future consumption potential... July is going to be very challenging," he said.

Garcia-Herrero of Natixis forecast the second half is likely to see retail sales growing only by low single digits, meaning consumption's share of China's GDP will shrink rather than expand as many economists believe it needs to.

"This is terrible news for rebalancing the global economy because China will continue to have to export its way out of trouble," she said.

Source: ZAWYA

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ING

Central Bank

Economic

Inflation relief with a "low" 0.1%

The May personal income and spending report has offered some encouragement that inflation pressures are easing once again after coming in far too hot in the first three months of the year. The core personal consumer expenditure deflator, a broader measure of inflation pressures than CPI that the Fed prefers to focus on, came in at 0.1%MoM/2.6%YoY. This was expected given the read through from components within the CPI and PPI reports, but after plenty of upside surprises this year, it is a relief. The headline measure (including food & energy) was 0.0%MoM/2.6%YoY, as expected.

Looking at the unrounded numbers, the month-on-month change in core inflation was actually a “low” 0.1%, coming in at 0.083% to 3 decimal places although April was revised up marginally to 0.259% from 0.249%, thereby making it a 0.3% MoM rounded, which is a tiny bit disappointing. Overall though, it helps the argument that inflation is looking better behaved, which may well open the door to interest rate cuts later in the year.

Core PCE deflator

US Inflation Relief and Consumer Cooldown Boosts Chances of Rate Cuts_1

Consumer cooldown continues

Household income was stronger than predicted, rising 0.5% MoM in nominal terms with real household disposable income also up 0.5%. Spending also recovered, rising 0.3% MoM in real terms, after April’s 0.1% drop and downward revisions to first quarter numbers. Nonetheless, the trend does appear to be slowing. Consumer spending averaged 3.2% real annualised growth in the second half of 2023, but assuming we get a 0.2% real MoM increase in spending in June, that will mean annualised consumer spending growth of just 1.5% in first half 2024. As such, both inflation and spending suggest tight monetary policy is cooling the economy and constraining price increases.

The Fed doesn’t want to cause an unnecessary downturn – rate cuts from September

The Fed believes monetary policy is restrictive at 5.25-5.50% in an environment where it views the neutral interest rate as being around 2.8%. The Fed doesn’t want to cause a recession if it doesn’t have to and if the data allows it to start making monetary policy slightly less restrictive, we think the Fed will take that opportunity, potentially as soon as September. For officials to be comfortable taking that course of action, we think the Fed need to see three things:

1.More evidence of inflation pressures easing. If we can get another couple of 0.2% or below MoM core inflation prints in quick succession that will be a necessary, but not a sufficient factor that leads to a rate cut.

2.More evidence of labour market slack. The unemployment rate has gone from 3.4% to 4.0%. If that moves convincingly above 4% with more evidence of a cooling of wages this too will help swing the argument in favour of rate cuts – jobless claims data and weak business hiring surveys suggests the jobs market is softening.

3.Softening consumer spending. It has been the primary growth engine in the US, but as stated, the rate of growth has halved between the second half of 2023 and first half of 2024. The Fed needs to see that continue through into the third quarter. Weak real household disposable income growth, the exhaustion of pandemic-era accrued savings for millions of households and rising loan delinquencies suggest financial stress is materialising for many lower-income families, suggests this will indeed continue.

If we get all three of these, we believe the Fed will seek to move monetary policy from “restrictive” to “slightly less restrictive” with 25bp rate cuts at the September, November and December FOMC meetings.

Source:ING

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Alex

Economic

Stocks

The global economy has been plagued by multiple crises in the last four years. The Covid-19 pandemic, the Russian attack on Ukraine, the synchronized monetary tightening by the central banks of the world and the Israel-Gaza conflict — all happening within a short span of four years has turned out to be a time of severe stress for the global economy. But the global economy has been surprisingly resilient.

It has smartly rebounded from the massive contraction of 2020 and inflation has been largely tamed. Even though the wars in Ukraine and Gaza continue, that is not impacting global economic growth and fears of a food and energy crisis have almost disappeared.

Global growth stabilizes

The near consensus among economists was that the US would tip into recession sometime in 2023, pulling global growth down. It was feared that the Euro Zone also may tip into recession.

Recession in the US and Euro Zone was expected to impact global growth. But the global economy surprised with remarkable resilience thanks to the impressive growth in the US. Global growth bottomed out at 2.3 percent after inflation peaked at 9.4 percent in mid 2022. The IMF's projection of 2.9 percent global growth in 2023 proved to be too pessimistic.

Global growth has bounced back by an estimated 3.2 percent in 2023 and IMF's growth projection for both 2024 and 2025 is 3.2 percent. Barring unforeseen circumstances, this appears to be the likely scenario.

Inflation tamed

Inflation surged in 2022 in the developed countries taking their central banks by surprise. By mid-2022, CPI inflation touched 9.4 percent in the US and crossed 10 percent in the EuroZone. The Fed and the ECB were forced to resort to ultra-tight monetary policy to rein in inflation.

The hawkish monetary policy has paid off with inflation cooling off even though US inflation continues to be higher than the Fed's long-term inflation target of 2 percent. Having put the inflation genie back into the bottle, the ECB has started moving into a dovish monetary stance with a 25 bp rate cut in June this year.

The Fed is expected to cut the Fed fund rate at least once in 2024 and four times in 2025. With inflation coming under control and growth remaining resilient, prospects of a soft landing for the US economy appear bright.

The slump in global trade also appears to be over. The IMF's projection is a smart recovery in global merchandise trade from 1.2 percent contraction in 2023 to growth of 2.5 percent in 2024 and 3.3 percent in 2025. This expected recovery in global trade, too, can aid growth, particularly for developing economies.

This emerging scenario is favorable for equity markets. In fact, the equity markets have largely discounted this optimistic scenario pushing major global stock indices to record highs.

A trade war in the offing?

What are the risks to this optimistic scenario? Many developments – presently known and unknown – can throw a spanner in the works. Continuation of the Ukraine war is a matter of concern. The Israel-Gaza conflict may aggravate into a regional conflict triggering an energy crisis.

The biggest threat appears to be a potential trade war between US and China impacting global trade and thereby, global growth. China has slowed down. Unfavorable demographics and the crisis in the property market will continue to weigh on Chinese growth. Faced with sluggish domestic demand, China will have to boost its exports.

This will face retaliation from the developed world. The European Union has recently increased the tariffs on Chinese electric vehicle exports up to 38 percent. The US, too, will raise tariffs on Chinese exports

Things are likely to take a turn for the worse under a Trump presidency, which appears increasingly likely now, despite Mr. Trump's indictment by the court recently. This possibility of a global trade war is the biggest known threat to the global economy, going forward.

Source: Economic Times

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Cohen

Economic

Morgan Stanley is turning more bullish on China’s banking sector, saying global investors are too pessimistic about the impact of the nation’s property downturn and weak economy on profits.

Measures by policymakers in recent months have put a floor under the real estate market and will cushion the risk exposure of lenders, preventing any worst-case scenarios, according to Richard Xu, the US bank’s chief China financial analyst. Reduced risks in the property sector and for local government financing vehicles suggests the costs of supporting the nation’s ongoing industrial upgrades are also manageable, underpinning growth, he said.

Morgan Stanley joins UBS Group AG and Goldman Sachs Group Inc. in voicing more optimism on China stocks as the government steps up support to the ailing property sector, even as investors expecting an earnings recovery are losing patience.

Morgan Stanley raised price targets for Chinese lenders this month by as much as 36%, partly on expectations that property sales at current levels are enough to support a rebound in mortgage loans, which would lead to higher profit margins and lower capital burdens, Xu said.

“Bank shares have yet to reflect such expectations,” he said in an interview in Beijing.

UBS earlier raised its recommendations on a key Chinese stock index to overweight in April as the market recovered from a meltdown earlier in the year. Morgan Stanley Investment Management has also been increasing exposure to Chinese stocks on cautious optimism that share buybacks will help boost prices.

Bank shares have rallied this year from rock-bottom valuations. Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, is up 19% this year in Shanghai. The lender’s price-to-book ratio has improved to 0.58.

Morgan Stanley Turns Bullish on Chinese Banks as Risks Subside_1

China’s government announced its most forceful attempt yet to rescue the property market in May, relaxing mortgage rules and urging local governments to buy unsold apartments. Yet home prices still fell at a faster pace that month. The nation’s biggest banks reported a rare drop in profits in the first quarter, as a combination of weak loan growth, margin contraction and lower fee income weighed on earnings.

Even if the pace of property destocking remains flat, Xu said, lower mortgage rates and down payments can help boost demand for the more profitable residential loans, which will improve bank margins. The program for local governments to purchase apartments could amount to providing a floor to home prices, preventing steep declines, he said.

Xu and colleagues maintained their “attractive” industry rating for China banks in a June 4 report and raised their price targets, saying that “the seasonal share price pullback before and after dividend payments should create a good buying opportunity.”

China’s policy shift since 2021 to prioritize risk containment, particularly in property and local government financing vehicles, while pushing industrial upgrades is paying off earlier than expected, Xu said.

In a report in May, Xu and colleagues estimated that banks will need to digest an estimated average of 2.2 trillion yuan ($303 billion) in non-performing loans from manufacturing in the next three years, which would be “a manageable level of costs for the level of industrial upgrades achieved.”

Investors have been skeptical that China can break away from the reliance on property for growth and shift to manufacturing “because they think the ditch is too deep to cross, and therefore they have no confidence,” Xu said. “But we believe China has made it.”

Source:Bloomberg

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Samantha Luan

Economic

The IMF has urged the US to “urgently” address its mounting fiscal burden, as it took aim at the tax plans of both presidential candidates just hours before their first electoral debate.

The fund said projects from its annual Article IV health check of the US economy showed the debt-to-GDP ratio hitting 140 per cent by 2032 — much higher than its current level of 120.7 per cent.

The surge, off the back of successive projected fiscal deficits in the coming years, would leave the debt burden in excess of previous highs in the aftermath of the second world war.

“Such high deficits and debt create a growing risk to the US and global economy, potentially feeding into higher fiscal financing costs and a growing risk to the smooth rollover of maturing obligations,” the fund said in its Article IV consultation. “These chronic fiscal deficits represent a significant and persistent policy misalignment that needs to be urgently addressed.”

The IMF’s warnings come after the Congressional Budget Office, the US’s official fiscal watchdog, predicted earlier this month that the deficit was likely to hit $1.9tn this year, or about 7 per cent of GDP, up from a February estimate of $1.5tn.

Economists and investors have grown increasingly concerned that neither US President Joe Biden nor his Republican rival Donald Trump are prepared to do enough to bring rampant spending under control. The two are set to meet in Atlanta on Thursday evening for the first debate of the current election cycle.

The fund said both candidates needed to “carefully consider” a range of tax rises — including on incomes for those earning under $400,000 a year, who Biden has pledged will not pay more tax should he secure a second term in the White House.

Trump’s tax plans, which include making permanent a series of cuts he introduced in 2017, are expected to add between $4tn and $5tn to US deficits over the coming decade.

IMF managing director Kristalina Georgieva said that strong growth in the US meant that the country had the space to address its fiscal burden.

“There is a temptation to postpone decisions related to debt and deficits for the future, rather than pay them when the sun is shining and conditions are good,” she said at a press conference on Thursday, adding that it was the role of the fund to be the “voice of reason” on the topic.

While Georgieva said on Thursday the fund did not support the Biden administration’s tariffs on Chinese green tech products, or Trump’s plans to impose a blanket 10 per cent levy on all imports, she acknowledged that there was a political case for such actions.

“Decades of globalisation has led to overall positive outcomes,” Georgieva told journalists. “But there have been negative consequences for some communities, including here in the United States, with jobs disappearing as a result of cheap imports from other countries.”

She added that the pushback to free trade from people in the US, and in Europe, indicated a “genuine concern” that “has to be taken seriously”.

Source:Financial Times

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Warren Takunda

Economic

Central Bank

According to new statistics, UK Gross Domestic Product (GDP) expanded 0.7% quarter-on-quarter in Q1, exceeding the first ONS estimate for 0.6%. On a year-on-year basis, the economy expanded 0.3%, which was more than the previous estimate of 0.2%

"As the fall in inflation has outstripped that in wage growth, real household disposable incomes (RHDI) have been rising, supporting the economy," says Ellie Henderson, an economist at Investec.

The ONS said RHDI growth at 0.7% quarter-on-quarter, matching the pace of expansion of Q4 – "a robust pace of income growth," says Henderson.

"The economy rebounded strongly from last year's recession," says Rob Wood, Chief UK Economist at Pantheon Macroeconomics, warning that the Bank of England might forgo an interest rate cut in August owing to strong economic growth.

Pound Sterling has been through a soft patch over recent days, but these data are helping the currency firm against both the Euro and Dollar ahead of a risk-filled week that will include French and UK elections.

Wood says the UK economy will continue to deliver robust growth, which will potentially delay a Bank of England interest rate cut. "Growth even further above potential in H1 2024 may give the MPC some pause for thought, and supports our call that rate-setters will wait until September before cutting Bank Rate for the first time," says Wood.

Pound Sterling Firms: Rising Incomes and Falling Inflation Boost UK Economic Growth_1

The Bank of England's June meeting minutes indicated enough members of the MPC were wavering on a decision to keep interest rates on hold to suggest they are close to cutting. The odds of an August cut are deemed to be around 50/50, according to market pricing.

However, a strong economy with rising real incomes will mean demand will stay strong enough to frustrate further declines in inflation.

"Looking ahead, our story for 2024 is all about the consumer. We expect real household disposable income to rise 2.2% in 2024 as inflation slows and wage growth remains strong. Cuts to National Insurance Contributions and the government uprating benefits in line with last year’s inflation also add 0.8pp to real disposable income growth in 2024. That income growth should flow through one-for-one to consumer spending," says Wood.

Source: Poundsterlinglive

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Alex

Economic

China, the world’s biggest investor in and generator of wind and solar power has been stocking up on coal in anticipation of peak demand during the summer.

Now, the move is about to start paying off as temperatures rise and so does demand for cooling. After several years of coal shortages during peak demand season, this year may be the first year that China avoids one.

Bloomberg reported this week that China had accumulated inventories of 162 million tons of coal over the first five months of the year, equal to about 8.5% of consumption during those five months, per data from cqcoal.com.

The increase came from both domestic production and imports. The former actually fell in the first quarter of the year after a series of fatal incidents prompted shutdowns and investigations in China’s coal country—the Shanxi province. Output ramp-up only began this month, but demand for coal has offset the effect of the temporary shutdowns thanks to a surge in hydropower generation following abundant rainfall.

Imports, meanwhile, rose quite substantially over the first four months of the year thanks to lower prices that boosted demand. Over the period, China’s imports of the commodity rose by 13%, as prices almost halved from a year ago.

China continues to lead the world in both wind and solar capacity, as well as coal capacity. Last year, global operating coal capacity increased by 2% as the world added a total of 69.5 gigawatts of coal power, with China representing two-thirds of new additions. The country is still going strong on coal capacity, in line with its all-of-the-above energy policy.

As for the immediate future, chances are there will be enough coal to secure supply for the hottest months of the year, especially as hydropower remains strong for the time being. Over the first five months of the year, hydro output rose by a respectable 15%, which led to a much more modest increase in cola-powered generation and, as a result, higher inventories.

According to Bloomberg, China’s economy is “sluggish,” which contributes to more moderate electricity demand growth, and while a GDP growth rate of 5.3% for the first quarter can hardly be called sluggish with any seriousness, the pace of industrial power demand growth has moderated, leading to a decline in coal demand.

As it happens, China’s comfortable coal supply position was also helped by none other than the weather. In addition to heavy rains earlier in the year to fuel higher hydropower output, moderate temperatures going into the summer are helping keep demand equally moderate.

Of course, this could change as summer advances, but it seems this year will not see a shortage of coal that threatens the security of electricity supply in China. The situation, however, begs the question of what happened with forecasts that wind and solar could replace hydrocarbons entirely. If China is any indication, this is not really true—and China is the biggest case study on transition technology because of the sheer scale at which it is installing that technology.

By the end of this year, China will have some 1,400 GW of wind and solar capacity. This would represent a substantial 40% of the energy mix, while the share of coal would fall to 37% from a little under 40% last year.

Yet China is still building new coal power plants instead of simply waiting for when it is time to retire existing ones and double down on wind and solar. However, China is aware that wind and solar cannot compare on reliability of supply with coal—and on price, incidentally—so it is keeping coal in its energy mix for the observable future, despite the ambitious net-zero targets.