Macro Insights Weekly: Shape of 4Q

Commentary: Shape of 4Q

Asia is ending 2021 with a few prominent drags. China continues to slow, rising energy prices are pushing up inflation, and the pandemic continues to linger in various shape and forms in the region. Additional developments hanging over the markets are (i) direction of US monetary policy, (ii) widespread supply side disruptions, and (iii) credit stress in China.

But all is not doom and gloom; we find it is easy to find sources of tailwind: US consumer demand continues to be very strong, which is good news for Asia’s exporters; supply chain disruptions many have peaked as semiconductor chip production has improved; and despite talks of taper and monetary policy normalisation in the US, global monetary conditions remain highly accommodative for fund raising, refinancing, and borrowing for corporates and individuals alike.

With this backdrop, we have run our real GDP Nowcasting model for 4Q. The top-down cue is positive, with the US economy shrugging off high energy price and supply constraints, and posting strong retail sales, housing, trade, and industrial production. Case in point is retail sales, which surged in October (up 1.7%mom, highest since March), with autos, home building, furniture, and recreational goods leading the way. Holiday sales seem to have started early, helping push up 4Q GDP Nowcast sharply, with Atlanta Fed’s latest estimate running at 8.7% (Seasonally adj, annualised).

The readings are not as positive for Asia, unfortunately, a region beset by China’s slowdown, supply side disruptions, and struggle to re-open the economy to travel and tourism. We are sure that the coming months will be characterised by steady opening up, but for the time being, the going is still tough for drivers of domestic demand.

China. The economy has slowed on the back of power shortage, pandemic resurgence, and credit tightness, but 4Q may well mark the bottom. Industrial output grew 3.5%yoy in October, a tad better than the previous month’s 3.1%. Growth of retail sales picked up to 4.9% from 4.4%. Fixed-asset investment came in at 6.1% YTD vs 7.3% in January-September.

Factory output bounced as power disruptions eased. The latest print suggests a slew of measures introduced recently to boost power supplies is paying off. Average daily coal output reached 11.53 million tons since November, an increase of about 1.1 million tons from end-September. Import volume of coal and lignite nearly doubled in October. Ongoing challenges, including a colder-than-average winter and emission controls ahead of the Beijing Olympics next February, will likely constrain output. Still, effective supply measures have mitigated the imminent power shortage risk.

India. The economy is slowing somewhat owing to rising energy prices and supply side production disruptions, but the sequential momentum is encouraging. Mobility is back at pre-pandemic levels, with reopening boost buoyed by the seasonal festive push. Daily Covid caseload is at ~3% (7-day average at 11-12k) of the peak of the second wave, accompanied by a 98% recovery rate and sub-1% positivity rate. Banking on a receding case count, reopening gains are being complemented by festive demand in 2H21 to provide a broad-based lift to activity.

Consumer sentiment is still playing catch up, underscoring a K-shaped recovery. The current situation index of the RBI’s consumer confidence survey has flattened. Motor vehicle registrations have fallen 7% in the past two months, alongside slowing automobile output as global chip shortage and supply dislocations hurt production.

Indonesia. With infections easing and vaccination picking up, Indonesia is on course to rebound in 4Q. Goods trade numbers have continued to be benefit significantly on the back of the sharp run up in commodities, which account for ~40% of exports.

Singapore. The economy remains characterised by strong export demand and a still-mixed domestic demand dynamic. Non-oil domestic exports (both electronics and non-electronics) grew robustly in October; even retail sales growth has picked up. Gradual re-opening ought to be theme for Singapore going in 2022.