China’s PMI continued its recovery into November, although fell slightly short of market expectations. The index rose from 50.2 in October to 50.6 in November.
The continued recovery in new orders is further indication of the modest China recovery story. The new orders index rose from 50.4 to 51.2 while export orders rose from 49.3 to 50.2. The main near-term theme is the end to the destocking cycle. Both the finished goods and raw materials inventory indices rose in November but remain well south of the 50 benchmark at 48.8 and 47.9 respectively. Industrial production has slowed sharply as the destocking part of the inventory cycle has played out but it appears a turning point has been reached.
Exports are still a critical part of the China growth story. Here the recovery story is likely to be more troublesome. Europe remains critical to China exports; while demand conditions there appear to be getting no worse, neither do we expect an imminent recovery. Our Europe GDP forecast for 2013 is +0.3%.
The gradual recovery in the manufacturing sector, the recovery in the housing market and the continued strength in private demand (retail sales), which has been relatively immune to the slowdown, gives me confidence to bump my December China GDP forecast to 7.8% (7.4% previously) giving annual average calendar year growth of 7.7%, just ahead of the official target of 7.5%. I continue to expect the recovery to be modest: I’m happy my 2013 forecast of 8.0%.
In America the manufacturing PMI dropped back under 50 in November to 49.5. That’s down from 51.7 in October. The production sub-index rose over the month, suggesting little or no impact from super-storm Sandy.
The weakness in the survey appears to have more to do with an element of caution from businesses in the face of the fiscal cliff. The new orders index fell from 54.2 to 50.3, the employment index fell from 52.1 to 48.4 and the customer inventories index fell from 49.0 to 42.5. That’s consistent with anecdotal evidence and other indicators that suggest businesses are holding back until the fiscal landscape becomes more certain and adds to expectations of some recovery in activity and employment once fiscal cliff issues are resolved.
As a result we’re expecting softer GDP increases in the period ahead. From a recently upwardly revised Q3 GDP increase of 2.7% (seasonally adjusted annual rate) I’m expecting 1.6% in Q4 and 1.2% in Q1 2013, followed by a bit of catch-up activity from Q2.