War and commodity price hikes twist global economy into stagflation. China's export results impress. Aussie data also impresses.
Kia ora,
Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.
I'm David Chaston and this is the International edition from Interest.co.nz.
Today we lead with news Russia has a new brutal ploy in their invasion of Ukraine. It says civilians can flee, but only toward Russia, otherwise they will be bombed. Virtually no-one is taking up the 'offer'. The rush west is continuing despite the risks and threats.
Commodity prices keep on rising. Hard commodities like nickel and tin who no signs of topping out. Iron ore is on the move up again. Wheat is the same. Your guess about where consumer prices and inflation are headed are about as good (or bad) as what professional analysts can muster. The speed of change, and the pervasiveness of it, is together unprecedented. Some analysts are saying this is the time for central banks to step up and do their job by pushing back much more aggressively now.
There is certainly going to be much higher inflation. But it is hard to see any economic expansion in the near future. The result will likely be a long period of stagflation, at best (if we can avoid recession).
Yesterday we pointed out the sharply higher prices for food. Today we should highlight the sharply higher costs of fertiliser. They were on the rise before the Ukrainian invasion due to higher oil costs which are key inputs for manufacturing nitrogen-based fertilisers. But because Russia and Belarus are critical sources for much of those imports, the cost of fertiliser for the world's farmers are soaring to another level. Food crops will become very much more expensive no matter how farmers respond - if they keep adding fertiliser to maintain production, consumers will have to pay for those costs. If they reduce or eliminate fertilisers, the sharply lower supply will raise prices too. (H/T CA.) "Going to bed hungry" will sweep over the world's populations much quicker now.
Late yesterday, China reported quite strong export sales for the first two months of 2022 (they don't do those two months individually). Exports were up +16.3% and imports were up +15.5% from the same period a year ago, although to be fair, the year-ago base was softer than usual. Chinese coal and oil imports fell sharply in the period, helping swell the overall balance. But it is hard to see these trends continuing, especially if they decide they need significant new stimulus.
Impressively, their trade surplus swelled to +US$116 mln in the period, up from +US$97 bln for the same 2021 period. Trade with the booming US economy helped a lot (+US$60 bln and up +US$10 bln from a year ago). With Australia they ran a -US$10 bln deficit in the two months (down from -US$11 bln), with New Zealand a -US$1.8 bln deficit (up from -US$1.25 bln).
But we need to keep the trade with the US in perspective. As good as it might be for China, the +US$10 bln surplus rise represents just over 4 hours of annual American economic activity and unnoticeable by them.
Meanwhile, China's foreign exchange reserves slipped slightly, a surprise because they were expected to rise slightly. This was a small shift as well, -$8 bln in a US$3.2 tln holding. It also represents the equivalent of about 4 hours of annual Chinese economic activity, also unnoticeable by them. Chinese 'huge' foreign reserves represent about 70 days of economic activity. Five years ago there were holding 89 days worth in these reserves, so they are slowly being eroded.
Events have overtaken the mood in Germany, but we should note that in January, German retail sales were on the mend in an impressive way, up more than +10% from the same month a year ago. However, subsequent gains may be more to do with 'panic buying' in the face of the security concerns, rather than a healing economic outlook.
Updated Aussie data released yesterday were quite positive. Their services PMI rose to a level that indicates a sharp expansion in that sector. That is a nine month high, and a strong expansion in any country. Their job ad levels rose as well, and to a 14 year high. Despite this good data, investors are retreating in financial markets.
The UST 10yr yield opens today at 1.73% and up +1 bp from this time yesterday.
The price of gold starts today at US$1979 and up another +US$6/oz from this time yesterday. But it has been quite volatile in between, topping US$2000 briefly and then retracing.
And oil prices are higher today and by +US$3/bbl level. No retracing here. In the US they are now just under US$113.50/bbl. The international price is just on US$121/bbl. All this will flow through to pump prices so working from home if you can will be a strong incentive. Airfares are going to be trouble too.
The Kiwi dollar will open today -¼c lower at 68.3 USc. Against the Australian dollar we are at 93.2 AUc and firmer. Against the euro we at 62.8 euro cents and unchanged at this much higher level although it got a lot higher temporarily in between. That all means our TWI-5 starts today at just on 73.6 and little net change from this time yesterday.
The bitcoin price is again lower today, down -2.0% from this time yesterday to US$37,985. Volatility over the past 24 hours has been moderate at +/- 2.6%.
You can find links to the articles mentioned today in our show notes.
And get more news affecting the economy in New Zealand from interest.co.nz.
Kia ora. I'm David Chaston and we’ll do this again tomorrow.