Kia ora,

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

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

Today we lead with news China's pandemic struggles are seriously undermining their economic life and the long-term impacts seem to be getting worse.

But first, we should note that it is a long weekend holiday in the world's largest economy. But this is also an important retail shopping period when all that inventory in global supply chains has a chance of clearing. It might be the start of the northern hemisphere summer, but how consumers react with their spending decisions will be equally important.

Across the Pacific in Japan, Toyota has lowered its global production forecast for June by about 50,000 vehicles, to around 800,000, as parts shortages caused by the pandemic lockdown in Shanghai continue to disrupt them. In Japan, that will involve a five-day halt at 16 local production lines.

China reported that its industrial companies saw profits grow +3.5% in the four months January to April. In the three months January to March they grew +8.5%. That means the April-alone result was very tough for their industrial companies. Profits at industrial companies fell -8.5% year-on-year in April alone. High raw material prices and supply chain disruptions have significantly squeezed margins.

Their lock-down pain is spreading fast now. According to Moody's, China's property development sector and its related supply chain account for as much as 28% of the country's GDP. And the struggles and declines we have been reporting for more than a year have now turned into a rout. Even State-owned property companies are in big trouble. It will be virtually impossible for China to achieve its expansion target of +5.5% with its property sector imploding.

But some relief may be in sight. Over the weekend, both Shanghai and Beijing started easing lockdown conditions.

For all its export prowess, and that has been impressive through the whole pandemic stress, Taiwan reported that its Q1-2022 GDP expanded at "only" +3.1% real. That is a reversion to the levels it was achieving pre-pandemic since the GFC. During the pandemic period it peaked at as much as +9%.

Singapore reported that its producer prices rose very sharply in April, in fact the fastest rise they have had in more than 40 years. They are up almost +30% year-on-year.

In India, the all-important monsoon has arrived earlier than normal this year, raising hopes that their agriculture will get a timely boost. The country has been suffering from excessive heat recently and rain can't come soon enough. But the north may have to endure another month of the debilitating heat.

In the US, the consumer inflation measure the US Fed watches most closely, the PCE, dipped slightly in April, 'down' to 6.3% from March's +6.6%. Excluding food and fuel, it recorded its lowest level of the year, down to 4.9%. The same data showed that inflation-adjusted personal incomes were unchanged but consumption expenditures rose. That is the fourth straight rising month. The financial markets liked that consumers are continuing their spending at good levels and Wall Street rose strongly last week to book a better-than-average gain.

But perhaps those markets should look at the sharply falling savings rate. Spending faster than income is eating into that rate quite quickly now.

That strong consumer spending impulse is reflected in the April trade deficit, on a merchandise-only basis coming in at -US$105 bln. Still that was -15% lower than for March. With port backlogs clearing, that was always going to push this metric up. It is also pushing wholesale inventories up, and if supply chain stress eases it might result in a downstream impact where orders will need to be cut back to give time to absorb them. Then again, no-one will want to be caught in supply chain hell a second time, so inventories may stay at higher levels for quite some time.

Those free-spending American consumers aren't feeling that great however. The latest measure of consumer sentiment is now back down at GFC levels. This time, that is probably more to do with their culture wars than their economic opinion. It is the start of their 'driving season' (from Memorial Day to their Labor Day) and this year with petrol prices so high there are much changed expectations that Americans will take to the road this year to holiday. That may juice up stay-at-home retail volumes and reduce holiday destination revenues. It is unlikely spending will be curtailed, just shifted. Those pattern shifts will be closely watched. Beef demand may rise for stay-at-home barbeque season. This will likely open up trade opportunities for New Zealand. We may also benefit from their infant-formula shortage. Foodservice demand may slip.

Coming up this week, we will get their non-farm payrolls report, and it is expected to add +310,000 jobs while their jobless rate stay near its historically low level of 3.6%.

Australia reported that retail sales were up +0.9% month-on-month in April, a faster pace than the +9.6% year-on-year. These are gains financial markets were expecting. But this data is not inflation-adjusted, so that colours the results.

The UST 10yr yield will start today at 2.74% and it likely to move little while the US is on holiday. 

The price of gold is unchanged today at US$1854/oz. But that is a +US$10 rise in a week.

And oil prices are little-changed from this time Saturday and still just over US$114/bbl in the US, while the international Brent price is now just over US$115.50/bbl. These are both +US$4/bbl weekly rises.

The Kiwi dollar will open today at 65.4 USc. Against the Australian dollar we are at 91.3 AUc. Against the euro we are at 60.9 euro cents. That all means our TWI-5 starts today at 72 and near its highest of the month.

The bitcoin price has risen +2.4% since this time Saturday and is now at US$29,182. Volatility over the past 24 hours has been modest at +/- 1.1%.

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’ll do this again tomorrow.