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Germany August Ifo business climate index 88.5 vs 86.8 expected

  • Prior 88.6; revised to 88.7
  • Current conditions 97.5 vs 96.0 expected
  • Prior 97.7
  • Outlook 80.3 vs 79.0 expected
  • Prior 80.3; revised to 80.4

The headline reading is a beat on estimates but still softer than it was in July. The same goes as well for the current conditions and outlook indices. In short, it tells that overall business sentiment remains soft but it seems to be another case of it could have been worse as economic conditions continue to weaken going into the winter months.

Eurozone August flash services PMI 50.2 vs 50.5 expected

  • Prior 51.2
  • Manufacturing PMI 49.7 vs 49.0 expected
  • Prior 49.8
  • Composite PMI 49.2 vs 49.0 expected
  • Prior 49.9

The manufacturing print beat estimates but still dropped to a 26-month low, while the services print continues to highlight a further decline in demand conditions – falling to a 17-month low. Meanwhile, the composite reading was slightly better than expected but still reflected a decline to a 18-month low. That signals a deeper contraction in the euro area economy in August than in July.

All in all, this points to a contraction in Q3 output and with services activity suffering already suffering ahead of the winter months, the outlook is rather bleak to say the least. S&P Global notes that:

“The latest PMI data for the eurozone point to an economy in contraction during the third quarter of the year. Cost of living pressures mean that the recovery in the service sector following the lifting of pandemic restrictions has ebbed away, while manufacturing remained mired in contraction in August, seeing another record accumulation of stocks of finished goods as firms were unable to shift products in a falling demand environment. This glut of inventories suggests little prospect of an improvement in manufacturing production any time soon.

“Declining output is now being seen across a range of sectors, from basic materials and autos firms through to tourism and real estate companies as economic weakness becomes more broad based in nature.

“The rebuilding of workforces following the pandemic is also losing steam, with firms increasingly reluctant to hire additional staff given falling new orders and relatively weak business sentiment.

“Businesses are at least continuing to see weaker rises in their costs, in turn increasing their selling prices at a softer pace. This should help to feed through to slower consumer price inflation later in the year, although it appears that any alleviation to the inflation situation is coming too late to provide any real support to demand. The remainder of 2022 is therefore looking to be one of struggle for firms across the eurozone.”

World Bank economist warns of rising risk of 1970s & 80s style debt crisis

n interest piece while we wait for financial markets to fully kick off for the week.

Japan’s Nikkei have excerpts from an interview with chief economist and director of the World Bank’s Prospects Group Ayhan Kose.

In a nutshell:

  • One of the risks we look at is this higher-than-expected rise in interest rates — so, the much faster tightening of financial conditions.
  • The other risk we look at is the risk of commodity prices being higher
  • and the third important risk we analyze is the risk of further COVID disruptions, the types of disruptions we saw in the case of China. These disruptions are quite important because they translate into the supply-side interruptions, weaker growth, as well as higher inflation.

Here is the link for more detail.

World Bank

China’s Economy Struggles to Recover from the Q2 Slowdown

China

The latest economic data from China show that the world’s second-largest economy unexpectedly slowed in July, raising concerns that recovery from the second quarter’s slowdown, when the economy narrowly escaped a contraction, hasn’t gained traction yet.

Weaker than expected July figures from industrial production and retail sales suggest that the recovery process is still fragile, prompting some economists to downgrade their forecasts for economic growth in the third quarter from an initial 4.5% to 4%, with threats of a possible further downgrade, depending on the strength in China’s exports in coming months.

Downbeat economic data also fuel fears about global economic growth, already hurt by the war in Ukraine, heavy sanctions of the Western world on Russia, the reverse impact of the sanctions, and soaring inflation.

China’s zero-tolerance Covid policy resulted in the most recent lockdowns of the commercial hub of Shanghai as well as some other industrial areas and tourist spots, deteriorating conditions in the property sector and persistently weak consumer spending were the biggest contributors to slower economic activity in July, which warns that post-pandemic recovery is losing steam after initial acceleration.

Industrial production grew by 3.8% in July, following a 3.9% expansion in June, and strongly missed the forecast for growth of 4.6%.

China’s retail sales, which only returned to growth in June, after showing strong negative results in the previous three months, rose by 2.7% in July compared to the period of a year ago after expanding by 3.1% in June and under undershooting expectations for 5% growth.

In such an environment, the People Bank of China was surprised by lowering interest rates on key lending facilities, with many economists expecting the central bank to continue in the same manner and cut its benchmark lending rates in the policy meeting next week.

But the economists think the space for further easing is likely to be limited, as many major central banks, led by US Federal Reserve, introduced aggressive stance in raising interest rates, in attempts to bring soaring inflation under control that would further widen the gap between the PBOC and other major central banks’ policies and increase capital outflows.

With the credit demand remaining sluggish on weak economic activity growth and inflation at a lower than expected level (July 4.2% vs forecasted 4.8%) the policymakers are in a difficult position to keep still fragile economic recovery and to limit the impact of new Covid outbreaks that would result in lower than expected economic growth this year, with projections set at around 5.5%, likely to be downgraded.

China faces another problem with the labor sector as youth unemployment remains very high (19.9% in July) though the negative impact was slightly offset by a lower jobless rate which fell to 5.4% in July from 5.5% the previous month.

Beijing hopes that still solid fixed investments which grew 5.7% in the first seven months of this year vs expected 6.2% growth, will help to balance the negative impact from other sectors and keep the economy recovering on the positive track.

Economists expect that China’s economic growth in the second half of 2022 will strongly depend on the situation with coronavirus, property sector, and exports.

UK Q2 preliminary GDP -0.1% vs -0.2% q/q expected

  • Prior +0.8%
  • GDP +2.9% vs +2.8% y/y expected
  • Prior +8.7%

Looking at the details, services output declined by 0.4% with the largest negative contribution coming from human health and social work activities, reflecting a reduction in COVID-19 activities. Household consumption declined by 0.2% with a positive contribution from net trade helping to offset things. Overall, Q2 GDP is seen 0.6% above its pre-pandemic levels i.e. Q4 2019.

The pound caught a light spike on the data from 1.2190 to 1.2215 upon release as the figures were better than anticipated but it still points to a contraction in the UK economy in Q2. I don’t see that as being much comfort as it just pushes the recession narrative one step closer than the BOE forecast of early next year.

Weekend data – China’s exports in June beat estimates and grew at their fastest this year

China July 2022 export and import data

China’s economy continued to recover from lockdowns earlier in the year through July, the best growth in exports will be welcome. Less welcome of course is the miss on imports, this will be read as a sign that domestic demand in the country continues to lag. Consumers in China are wary of the imploding property sector being crushed by heavy loads of debt, a repayment strike from homebuyers not seeing promised homes delivered by developers, and widespread contagion. Government economic support is helping cushion the blows, but not entirely.

Ifo economist: German economy facing uncomfortable times

  • Uncertainty among companies have increased significantly
  • Recession is knocking at our door
  • It cannot be ruled out if situation continues developing as it is currently

This is not a surprising development by any means if you have been following how things are going in Europe. The only people oblivious to the risks as always, have been central bankers. Or more like the fact that they are just stuck in their own little world.