Grim economic data from US, China, Germany leaves Australia exposed

In recent weeks, there has been widespread panic about the US debt ceiling crisis, with the world’s biggest economy running out of cash – fast.

Tense negotiations are currently underway in Congress regarding the US debt ceiling, which now sits at $US31.4 trillion ($A46.8 trillion).

Democrats want it to be raised immediately, while Republicans are pushing for a range of conditions such as spending cuts to be met before agreeing to lift the self-imposed borrowing cap.

If a deal to raise the debt ceiling is not reached soon, America could default – for the first time ever – as soon as June 1, according to Treasury Secretary Janet Yellen, who said it would cause “an economic catastrophe” both in the US and across the planet.

At the same time, the International Monetary Fund (IMF) this week revealed economic powerhouse Germany will battle muted growth in the near term, as a result of tighter monetary conditions and energy price shock.

The IMF predicts growth in Germany’s gross domestic product will remain around zero this year, before gradually strengthening in the years ahead.

But there are many challenges on the horizon as well thanks to the nation’s ageing population and no likely boosts in productivity or labour on the table.

And grim news has also come out of China this week, with data from April revealing weaker than expected retail sales growth and industrial output from the world’s second largest economy, alongside a drop in property investment and average daily coal production and aluminium and crude steel output.

“As disappointment kicks in, we see a rising risk of downward spiral, resulting in weaker activity data, rising unemployment, persistent disinflation, falling market interest rates and a weaker currency,” Nomura economists told Reuters in response.

IG Markets analyst Tony Sycamore told news.com.au the news out of the US was “interesting” as over the past 48 hours, there has finally been signs of progress around the debt ceiling debacle.

“President Joe Biden’s announcement that he will cut short his trip to Asia is viewed as a sign of his commitment towards making a deal,” he said.

“The second was the decision to narrow the number of staff on the negotiating team, evidence that talks have moved to a more advanced stage.”

But he said when it came to US economic data, things were “patchy”.

“Examples of economic resilience follow pockets of weakness. For example, Q1 2023 earnings were much better than expected. Last night, there was a lot of focus on jobless claims data expected to increase as more Americans filed for unemployment benefits,” he said.

“However, the number was better than expected … and at the same time, there was an unexpected improvement in the Philly Fed Survey (-10.4 in May, versus -19.8 expected).

“All of this has contributed to the rates market now pricing in a 40 per cent chance of a 25 basis point rate hike in June, in contrast to the expectation a few weeks ago for a Fed pause in June.

“Another example is the high beta Nasdaq overnight soared to a 52-week high after gaining 3.71 per cent this week.”

Mr Sycamore added that while European growth has done “much better than expected this time last year, some cracks have begun to appear”.

“This week, the German ZEW economic sentiment index declined to -10.7 in May, the lowest level in five months,” he said.

“While part of the decline can be explained by expectations of future interest rate hikes by the European Central Bank, economic uncertainty around the China recovery will also have played a part.”

And finally – and perhaps most concerning for Aussies – Mr Sycamore noted that signs of a “sharp slowdown” in China had emerged in recent weeks, and that “concerns are rising as the China recovery falters” post-Covid.

“Last week, imports, inflation, and bank lending data disappointed. This week (was) a similar story as industrial production, retail sales and fixed asset investment all missed the mark,” he said.

“Within that, infrastructure investment, a key driver of jobs and growth both in China and Australia, has decelerated, primarily due to rising funding pressures and as the front loading of Q1 stimulus fades.

“Manufacturing PMIs have slipped back below 50 into contractionary territory. If the housing market continues to fall and policymakers fail to respond, the risk of a double-dip China slowdown increases.”

He said it was “bad news for China and worse news for Australia, which still relies on China as its biggest export market”.

“Reflecting the perilous state of the recovery, the Chinese currency, the Yuan, is trading at its weakest level against the US dollar in five months at 7.03,” he continued.

“It has now given back all the gains it made and more following the China reopening in December last year.”