Thoughts

July 15, 2022 | 15:57

Summer Doldrums? What Summer Doldrums?

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

There are plenty of topics on the agenda for the G20 Finance Ministers/Central Bankers’ meeting this weekend in Jakarta, with inflation likely topping the list. “Does anyone want to do a 200 bp’er? Anyone? Anyone?” But, there will likely be lots to say by the water cooler as well, following such an eventful week.

There were surprises on the data front. Take China, for instance. We knew Q2 would be weak, but not that weak. Real GDP fell 2.6% q/q in Q2, the first setback since the early days of the pandemic. From a year ago, the gains were trimmed to just 0.4%, the weakest since 2020Q1 (and +2.5% in the first half of 2022). It was, obviously, far worse when you zoom into the cities that were locked down. Real GDP in Shanghai plunged 13.7% y/y in Q2, and Beijing fell 2.9% y/y. That’s a little difficult to stomach (where are my po chai pills?), but that’s what happens during lockdowns. And when they end, the economy rebounds and that is what, sort of, happened in June. We’ve already seen a sizeable 17.9% y/y jump in export activity, and a surge in credit demand. Retail sales rose a better-than-expected 3.1% y/y (cosmetics and jewelry were up 8.1% y/y), though industrial production’s 3.9% y/y gain was a little disappointing. The pickup in growth as Q2 came to an end is encouraging as it signals some pent-up demand as the economy reopened and consumers resumed doing what they normally do. But there are hurdles ahead, and the economy is clearly struggling: a government official said Q2 growth was “hard won”. Plus, with the return of mass testing in Shanghai, a couple of hundred buildings locked down, and the discovery of a new variant, the struggle will continue. And, forget the “about 5.5%” growth target.

The U.K. data surprised in the other direction, with stronger-on-the-surface (but not below) readings for real GDP in May, and upward revisions to April. One of BoE Governor Bailey’s remarks this week summed up his main message: “Bringing inflation back down to the 2% target sustainably is our job, no ifs or buts about that.” Indeed, this week’s round of data, along with 40-year high inflation, should open the door for a 50 bp rate hike on August 4.

On the monetary policy front, central banks were seemingly out in full force, front-loading their rate hikes to broadcast their intent to contain inflation. There was the Reserve Bank of New Zealand (+50 bps), the Bank of Korea (+50 bps), the Monetary Authority of Singapore (re-adjusting its SGD band), and the Bangko Sentral ng Pilipinas (+75 bps). Next week will be the ECB (+25/+50 bps for the deposit rate? Or +25 bps for all three key rates? We lean to the latter) and the BoJ (no comment).

Then there was so much turbulence on the political stage, capped off by the attempted resignation (“No thank you, take it back”, said President Sergio Mattarella) by Italian PM Mario Draghi after he lost support from the Five Star Movement. At least his resignation was ‘voluntary’ (although Giuseppe Conte’s move really left him no choice). In the U.K., the ‘involuntary’ resignation of Boris Johnson had dozens throwing their hat into the ring but, after a couple of rounds of votes, it looks like the front-runners are former Chancellor Rishi Sunak and Trade Minister Penny Mordaunt, but don’t count out Foreign Secretary Liz Truss just yet. We will find out September 5 who the new leader of Britain shall be.