As I noted earlier, Chinese data today was the first persuasive signal that growth is set to slow as expected in H2 this year. Capital Economics has more:
The activity and spending data for July all came in below expectations, reversing most of improvement seen at the end of Q2. Nonetheless, industrial production still looks unsustainably strong given the growing headwinds to investment growth from policy tightening.
Industrial value-added expanded 6.4% y/y last month (the Bloomberg median was 7.1%, our forecast was 7.5%), down from 7.6% in June. Admittedly, we don’t put much weight on the headline figures for industrial growth since they appear to suffer from similar flaws to the GDP data and have been implausibly stable in recent years.
Instead, we prefer to focus on the underlying data on the output volumes of individual products, which aren’t deflated using questionable price series. Our industrial output index – which combines the output volumes of key products – suggests that, having slowed more than the official figures show since the start of the year, industrial output actually held up well in July. (See Chart 1.)
That said, the strength appears confined to a few sectors such as steel, with relatively weak production of consumer goods and most other commodities. (See Charts 2 & 3.) Indeed, softer foreign demand appears to be weighing on the broader manufacturing sector, with growth in industrial sales for exports declining last month from 11.7% y/y to 8.6%.
The resilience of steel production is unlikely to last, given headwinds from slowing investment growth. Fixed investment expanded 8.3% y/y during the first seven months of the year (Bloomberg 8.6%, CE 8.6%), down from 8.6% in the first half. This implies a slowdown from 8.6% y/y in June to 6.8% last month. Investment spending looks even weaker once we adjust for the still rapid pace of capital goods inflation. (See Chart 4.)
The slowdown in capital spending last month was concentrated among private sector manufacturing firms. That said, property investment and state-led infrastructure spending also softened. (See Charts 5 & 6.)
The property market looks to have cooled markedly in July. Growth in new housing starts and sales both dropped, with the latter now at its weakest level since 2015. (See Chart 7.)
Finally, retail sales growth also slowed, from 11.0% y/y to 10.4% (Bloomberg 10.8%, CE 11.0%). Car sales slowed along with sales of products linked to the property cycle including furniture, decorating materials and white goods. (See Chart 8.)
The upshot is that both foreign and domestic demand appear to have softened at the start of Q3. A few sectors, such as steel, seem to have defied this slowdown. But the strength in these areas likely won’t last given that policy tightening is set to further weigh on infrastructure and property investment in coming quarters.
Set your iron ore and Aussie dollar shorts…