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Economics & Markets

A Chinese recovery is encouraging news for the Australian economy

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Sydney, Australia

In a time where our national mood fluctuates on a daily basis with the latest case numbers from Victoria, some of the most positive news is actually coming out of China.

Economists have been busy revising their growth forecasts for China1 on the back of strong second quarter GDP numbers. There are those who may harbour scepticism around official data out of China, but in this case the headline figures appear to be backed by other private economic indicators.

Private sector manufacturing Purchasing Managers Indices (PMIs), for example, have recovered to levels around their ten-year average leading. Coal movements through major ports in August were up around 10% year-on-year2, after lagging below historical levels for most of the first half of 2020, and rebounding traffic congestion and property transaction volumes tell a story of city life returning to normality.

This is good news for Australia in several different ways. First, increased economic activity out of China should support our own recovery. Second, the fact that China appears to have pulled off a ‘deep V’ rebound, despite having dealt with its own second wave is encouraging for other countries hoping to emulate that feat.

Recent PMI updates for other economies in August have been a mixed bag: flat in Australia and Europe, for example, and rising in Japan, but on the whole the news is more positive than negative.

Since the beginning of the pandemic we’ve been running an in-house US Economic Activity Tracker, which is drawn from a range of indicators as varied as rail freight loads, retail foot traffic, and cell phone mobility indices. It shows that the country’s strong recovery out of April stalled in June, but that activity has begun to trend upwards again, albeit at a steadier pace.

World GDP is tracking to return to positive growth in the current quarter, although this doesn’t mean we will be straight back to normal. We look to have a avoided a worst-case scenario, but activity will take some time to return to normal levels, and higher unemployment will continue to persist as we deal with the lasting effects of lost activity in the June quarter.

In turn, excess capacity in the labour market should keep a lid on inflation and give the RBA and other central banks room to maintain a low interest rate environment for a while yet, but it’s unlikely that the government will be able to ease up on their fiscal stimulus any time soon.

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Important notes

While every care has been taken in the preparation of these articles, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in them including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. Performance goals are merely goals. There is no guarantee that the strategy will achieve that level of performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. These articles have been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. They should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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