China Continues to Slow Raising Risks for Australia

China’s economy continues to slow, and it is a big worry!

We should be seeing a soft landing by now, but the airport just isn’t in sight yet?

China’s Manufacturing PMI contracted for the fourth straight month, coming in at just 49.3 in July. For the world’s largest and most significant manufacturer to be seeing sustained manufacturing contraction, even with the supposed lift of the post lockdowns boom, should be of great concern to everyone.

China Manufacturing PMI

This contraction in manufacturing, unfortunately, also points to a continued slowing in Western economies demand generally, and indeed the global economy as a whole.

We should not be interrupting this data as a purely China phenomenon or look at it in isolation. We know US manufacturing has been in recession for some time. It is reasonable to now say that the manufacturing sectors in the world’s two largest economies are currently both in recession.

Markets appear unaware that this is as bad a fundamental scenario that can be drawn up. In fact, it was a slow-down in manufacturing that preceded the US stock market collapse and depression of 1929. Not to say we are going to have that experience, but to necessarily point out just how bad the global economic outlook is right now.

Certainly, it is far worse than Wall Street forecasts and commentaries are suggesting. Therefore, the market is vulnerable to what I call “reality realisation”.

China Services PMI

The China Non-Manufacturing or Services PMI, was down to 51.5 in July, from 53.2 previously, and has been falling sharply for the past four months.

China Composite PMI

The overall Composite PMI for the economy as a whole was similarly down to just  51.1.

China is still searching for a soft landing and hasn’t found one yet. The global economy is clearly slowing as well. While the US appears capable of a soft-landing, it is likely to experience a sustained period of sub-potential growth or worse.

The recession in Germany and softening data elsewhere in Europe are also of concern.

For Australia, all of this raises questions. Especially the China slow down. With manufacturing in recession and China increasingly sourcing our commodities elsewhere when it can, can our miners and overall stock market levels hold?

Adding to the external risks were data in Australia today showing private credit growth dropping quickly toward contraction. Having slowed markedly, private credit growth dropped to just 0.2% in June.

This is yet another ‘Recession Down-under Red Flag’, and comes on top of that terrible 0.8% contraction in Retail Sales.

With both the external environment and the domestic economy sounding alarms at the same time, it might be time to consider more defensive portfolio structures yet again.

The stock market has been resilient this past year, but one has to wonder how long it can last in the face of such damning fundamentals. Global and domestic.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.