Aging Dragon

Here are some of the biggest stories from last week:

• US retail sales accelerated more than expected in December.
• The Chinese central bank left a key interest rate unchanged despite continued deflation and slowing loan growth.
• The country’s economy grew by 5.2% last year.
• But its population continued its historic decline.
• Inflation in the UK unexpectedly accelerated in December.
• Wage growth, meanwhile, slowed sharply toward the end of last year.

Dig deeper into these stories in this week’s review.

US

Retail spending in America rose at the strongest pace in three months in December, as consumers kept shopping over the holiday period despite high interest rates and inflation. The value of US retail sales, which is adjusted for seasonality but not for inflation, rose by 0.6% in December from a month earlier – higher than the 0.4% expected by economists and a notable jump from the 0.3% pace seen in November. The figures capped off a year marked by surprising economic resilience, largely fueled by Americans' continued willingness to spend, and suggest that the US consumer is entering 2024 in good shape.

China

Many China hopefuls expected the country’s central bank to kick off the week with a rate cut, but much to their disappointment, it held a key interest rate steady on Monday. The People’s Bank of China left its one-year medium-term lending facility rate unchanged at 2.5%, defying economist expectations for a 0.1 percentage point cut. Although the central bank injected additional cash into the system to meet demand for funding, it likely refrained from cutting rates to prevent any further depreciation of the yuan. The Chinese currency has fallen by around 10% against the US dollar since 2021, as the interest rate differential between the two economies widened.

Still, investors were hoping for bolder action from the PBOC – especially after two separate data releases late last week showed China’s economy remained in deflation in December, and loan growth fell to a record low. Consumer prices fell by 0.3% in December from a year ago – in line with forecasts for a third straight month of declines, and marking the longest deflationary streak in 14 years. Prolonged deflation – a result of weak domestic demand, an ongoing property crisis, a sluggish job market, and falling exports – is a big risk for China because it can lead to a downward spiral of economic activity. Anticipating further price drops, consumers might delay purchases, further dampening already weak consumption. Businesses, in turn, might lower production and investment due to the uncertain demand outlook.

Further highlighting the poor state of domestic demand in China, last month saw loan growth increase at its weakest pace on record. Yuan-based bank loans expanded by a less-than-expected 10.4% in December from a month ago – the slowest increase since records began in 2003. The ongoing slump in the property sector, which once accounted for almost a third of all loans, is reducing demand for mortgages and making banks more wary of lending to developers after many defaulted on their loans. Overall, the disappointing data is likely to intensify demands for the central bank to implement measures to stimulate credit growth and, in turn, domestic demand. Beyond reducing interest rates, this could involve lowering the amount of cash banks must keep in reserve.

Wrapping up this week's series of data releases from China were the country's 2023 GDP and population figures, which were a mixed bag for the world’s second-biggest economy. Chinese GDP grew by 5.2% last year – a marked uptick from the modest 3% growth in 2022, when the country was under the government’s strict zero-Covid restrictions. Last year’s growth matched economists’ forecasts but exceeded the government's official target of “around 5%”, which was its lowest goal in decades. The real estate sector, which has been plagued by a debt crisis for three years, remained in distress throughout 2023. Investment in property development dropped by 9.6% last year compared to the one before, while new home prices slid 0.4% in December from the previous month – the steepest decline since February 2015.

Adding to China's problems, its population continued a historic decline in 2023, with the number of people in the country falling for a second year in a row to 1.41 billion. Last year’s drop of over 2 million people more than doubled the dip seen in 2022, when the Chinese population shrank for the first time since 1961. Deaths in 2023 rose to 11.1 million – almost 700,000 more than the previous year and the highest since 1960 – while the number of births dropped to a record low of 9 million. All in all, the shrinking population combined with a rapidly aging society is expected to bring further headwinds to the country’s flagging economy, in part by shrinking the size of the workforce that drives growth and funds pension systems.

UK

Data late last week showed the UK economy rebounded more than expected in November, although not by enough to rule out the possibility of a technical recession in the second half of 2023. The British economy rose by 0.3% between October and November, driven by growth in the services sector. That was slightly higher than the 0.2% expected by economists, and a notable bounceback from the 0.3% decline between September and October. After the UK economy dipped in the third quarter, investors are hoping that it'll avoid shrinking again in the final quarter of 2023, thereby dodging a technical recession. The latest figures, then, mean the UK would require a flat December to avoid a contraction for the full quarter. Problem is, that month was held back by wet weather and strikes, meaning a technical recession is still a very legitimate possibility for the UK economy.

Making matters worse, inflation in the UK unexpectedly accelerated in December for the first time in ten months. Consumer prices increased by 4% last month from a year ago – up from a 3.9% rise in November and defying economist expectations for a small dip to 3.8%. Services inflation, which is closely monitored by the BoE as a better measure of domestic price pressures, also accelerated, to 6.4% in December from 6.3% in November. Core inflation, which excludes volatile food and energy prices, held steady at 5.1% (economists had expected it to fall to 4.9%). All in all, the figures were not exactly what the BoE wanted to see, prompting traders to scale back their aggressive bets on lower interest rates. Markets are currently pricing in four quarter-point reductions for this year, with the first one arriving in June.

This uptick in inflation comes despite a notable slowdown in UK wage growth toward the end of last year. Average annual growth in regular earnings, excluding bonuses, was 6.6% in the three months to November – in line with expectations and a fall from a downwardly revised 7.2% in the period through October. Annual growth in total pay, meanwhile, slowed to 6.5% after hitting a record high of 8.5% in July. However, with inflation still falling more quickly, earnings continued to grow in real terms, easing the tight squeeze on Brits that has prevailed over much of the past two years.

Next week

• Monday: China one-year loan prime rate announcement.
• Tuesday: Bank of Japan interest rate announcement, eurozone consumer confidence (January). Earnings: Netflix, Visa, 3M, General Electric, Johnson & Johnson, Procter & Gamble.
• Wednesday: Japan trade balance (December), Bank of Canada interest rate announcement, eurozone, UK, and US PMIs (January). Earnings: Tesla, AT&T, IBM.
• Thursday: US GDP (Q4), European Central Bank interest rate announcement, US durable goods orders (December). Earnings: Intel, Blackstone.
• Friday: Eurozone M3 money supply (December). Earnings: American Express.