Kia ora,

Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the holiday edition from Interest.co.nz.

Today we lead with news China is at a pandemic turning point, forced on them by a stuttering economy. It is not necessarily a positive turn.

We are ending the year with fallout from the growing stresses over China's new pandemic management. China will no longer require visitors to quarantine from January 8. They are emerging from three years of self-imposed global isolation under their Covid Zero policies, policies that hurt their economy and caused widespread public frustration.

With demand at home tanking, Chinese manufacturers are prioritising exports. But with Western supply chains full, and a fast-growing reluctance to rely on supply from China, the options for these suppliers are closing on them. Some are getting desperate. And prices for Chinese supply are falling very fast, even on a weekly basis.

Competitors in Asia and beyond are facing Chinese suppliers cutting prices hard. And that is making their life a misery. Trading rules (about dumping) can't respond fast enough. Prices for plastics and steel prices are at the forefront of this shift. Places like India, Vietnam, South Korea and Japan are feeling the brunt of the desperation. Chinese steel exports have risen +28% while prices have fallen -40%. The squeeze is intense. The story is similar for many grades of industrial plastics with prices down -25%. Solar panel component prices fell by -10% in just the past two weeks.

Also not helping is that the global car industry is cutting its sourcing from China, and rather quickly. The changed visitor policies are unlikely to reverse the trend.

This shift is very sudden, and as competitors respond, prices fall and availability rises. This is sure to put sharp downward pressures on producer prices, and renew the possibility of deflation returning.

The grim trade pressures are mirrored by grim pandemic measures at home. Beijing city is under threat and orders have gone out to protect the center of power. Several provinces have sent medical teams to the capital, despite criticism from local health officials and workers that they, too, are stretched to their limits. That is sure to continue resentment in a cascading series of what citizens see as missteps.

In their economy, China reportedforeign direct investment growing less than +10% from November a year ago, which is a fast reducing pace. They are calling it 'stable".

And China's industrial profits fell further in official data to November. They had suspended this reporting for the three prior months, and that catch-up is hardly believable. It is likely that the real situation is worse as State Owned Enterprises borrowed heavily to meet Beijing's requirements to mitigate the impact of the slowing economy.

Meanwhile, Taiwanese industrial production is under pressure from the full-court press by the Beijing team, and came in down -4.9% from the same month a year ago. Beijing's economic freeze is taking its toll, and now China's natural demand pull is softening fast too.

Taiwanese retail sales are losing out as well as their citizens grow worried about the China grip. They are now barely above year-ago levels and not even making inflation's expansion now.

So it is little surprise that Taiwanese consumer sentiment is very weak.

Japanese inflation rose to 3.8% in November, its highest in more than 40 years. Their price rises are broadening and will pressure the Bank of Japan to ease off on its long-running and massive stimulus. In fact the Japanese government bond yield turned solidly positive at the end of last week in a building trend that markets see a change in policy coming. Then again, events are moving fast for them. That trade pressure from China may involve yet a new calculus. Meanwhile, Japan is tightening controls on visitors from China.

Across the Pacific the giant American economy is ending with mixed economic signals, but consistent with the easing inflation pressure the US Fed is trying to manage consistent with a 2023 soft landing. Certainly the American economy is in far better shape than most analysts and pundits had assumed, both at the start of 2022, and even just three months ago. The resilience is impressive. But will it last?

US durable goods orders however came in much lower than expected. They were down -2.1% in November from October and their worst month-on-month result since the 2020 pandemic shock. However they are ending the year +6.3% of year-ago levels and keeping up with inflation. Capital goods orders were up +4.6% on that same basis and not quite keeping up.

Retail inventories were unchanged in November from October, but wholesale inventories picked up sharply, up a full +1.0%. Partly that is because consumers are buying less electronics. And it was also despite an unusual fall in imports, delivering a sharply reduced trade deficit in November. American exports did grow however.

Meanwhile inflation's impulse seems to be moderating there. Their widely watched PCE price index was up +5.5% in November, a notable reduction from the +6.1% rate in October. "Better" still, the month on month rise was at an annualised +1.5% rate, the least in four months and well below the annualised +5% rate in October from September. In November, incomes are still rising at a +5% annualised rate, so faster than expenditures. Overall, these trends are positive.

Also positive was the rise in new home sales in November, up +5.8% from October when a fall was expected. But that can't hide the fact that they are running substantially slower than year ago levels, about -15%. Still, there was an unusual boom over the pandemic, so they are really just lack to pre-pandemic levels again.

And the final University of Michigan consumer sentiment survey not only confirmed the rising mood, it came in above their flash result. Although it is not back to year-ago levels, it seems to be on its way. Helping are the American petrol prices which continue to edge down. And at this time of year heating oil prices are important for many families and they too are now well off their June highs and back to February 2022 levels. Administration management of these pressures seems impressive in hindsight.

The massive spending bill just approved by Congress (8% of GDP) will flow through their economy in 2023, much of it in local industrial production, not insignificantly because to get Republican support, an outsized part was for the Pentagon. There will be international flow throughs however, not the least being enhanced support for Ukraine's defence.

In Germany the mood is brightening as we have reported earlier in the week, partly because the weather is cooperating. But there remain questions about whether this will translate into higher personal spending in the face of threats on their borders. The German savings instinct may crimp their economy.

We should also note that insurers are now pulling back from covering ships that trade with Russia, and this is likely to roil oil and gas markets.

The war on Ukraine is about to heat up. The winter has been milder there than usual, meaning the mud has stayed longer than expected. When if freezes allowing heavy military vehicles to move, both side are gearing up for new attacks and counter-attacks. Things will be tense until the Spring thaw as Russia throws men into the southern and eastern meat-grinder battles. The inability of the Russians to change tactics as they suffer enormous losses is striking.

The UST 10yr yield started today at 3.85%, and up another +10 bps from Christmas Eve. 

The price of gold will open today at US$1814/oz and up +US$16 from yesterday.

And oil prices start today up +US$1 from pre-Christmas levels at just under US$81/bbl in the US while the international Brent price is just under US$86/bbl.

The Kiwi dollar opened today at 62.4 USc and down -¼c from this time yesterday. Against the Australian dollar we are a little softer too at 93.1 AUc. Against the euro we are just under 59 euro cents. That all means our TWI-5 starts today at 71 and down -20 bps.

The bitcoin price is now at US$16,653 and down -1.5% from this time yesterday. Volatility over the past 24 hours has again been modest at just under +/- 1.5%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we will do this again tomorrow.