COVID comes back for a second bite

Kia ora,

Welcome to Monday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news the pandemic is taking second bite out of our economic recovery.

But first, industrial profits in May in China recovered strongly on a year-on-year basis, but if we compare them with May 2019 levels they are up a still-good overall +48%. But the recovery is still unbalanced, with smaller companies registering a slower pace than large and medium-sized enterprises. Of 41 industrial sectors tracked, nearly 70% posted yearly profit increases for May, while 80% showed profits at about 2019 levels.

China is focusing its efforts to get its relatively low consumption (60% of GDP) up to developed country levels (80% of GDP). And their 'dual circulation' policy is aimed at doing that. They have a very long way to go, but the progress will be quite extraordinary and distortionary to the world economy with many winners and some losers along the way.

S&P has affirmed its A+ credit rating for China. It is not a rating that China has solicited. It sees the country able to maintain above-average growth in the next few years and wants to see it repair its deteriorated fiscal debt position over the next three to four years.

China is trying to tighten the screws on its trade with Australia, now extending the pushback to other areas. The WTO actions it initiated last week involve matters involving 1995 events (stainless steel sinks) so it is digging deep into its bottom drawers to find pressure points. It has now also initiated a pullback in academic cooperation over Antarctic research, and coral reef research.

More generally, China is pushing its influence on climate change negotiations.

Japan has ratified the RCEP, one of the largest economies to do so. Thailand, Singapore and China have already done so too. New Zealand has signed but not yet ratified it.

Singapore industrial production is bouncing back very strongly after some recent lackluster months. In May it was up +7.2% from April and up +30% from the same month a year ago. From May 2019 it is up almost +20%.

In Indonesia, hospitals are reported in a state of collapse as the pandemic grips the nation. Indonesia has about 175,000 doctors, 90% vaccinated with China's Sinovac vaccine. Over 400 have dies so far from COVID. Of the 26 who died in June, ten had been fully vaccinated.

The Sydney pandemic outbreak is spreading. Overnight the number of Delta-variant-infected people rose to 112 with 30 more yesterday alone. There are now 181 locations where a visit requires self-isolation. NSW is in lockdown for at least two weeks, but there are issues in other states as well. A failure to act decisively earlier looks like it hasn't worked to keep the Delta variant from spreading. The Federal Government has dropped the ball on vaccine supply, so the vaccination option isn't available to them. New Zealand extended its travel bubble pause with Australia for another 3 days last night. The Level 2 restrictions in Wellington have also been extended until Tuesday night. The problem is that the Delta variant can infect others rapidly before symptoms become obvious making contact tracing and early isolation extremely difficult.

In the US, the inflation data the Fed watches was released over the weekend. The personal consumption expenditures (PCE) price index for May increased +3.9% from one year ago, reflecting increases in both goods and services. These rates are high but probably not high enough for the Fed to change its "this is transitory" stance.

Personal income slipped in May, but only because of a pullback in government benefits. The last industry survey for May had weekly earnings rising +2.6% in the past year. Personal spending was little-changed in May, but it is up +20% for goods from just before the pandemic hit, and down -1% for services on the same basis. It does seem now primed for strong growth in services over their summer period.

The Federal Reserve released its updated annual bank stress tests as at March 2021, which showed that the 23 largest American banks continue to have strong capital levels "and could continue lending to households and businesses during a severe recession". 

The UST 10yr yield starts today down -2 bps at 1.52%. 

The price of gold starts at US$1782/oz which is up +US$2/oz from this time Saturday.

Oil prices are firmer again to start the week, in fact now the highest in nearly three years. In the US they are now at just under US$74/bbl, while the international Brent price is just under US$75.50/bbl.

The Kiwi dollar opens today unchanged at 70.6 USc. Against the Australian dollar we are also unchanged at 93.1 AUc. Against the euro we are unchanged too at 59.2 euro cents. That means our TWI-5 starts the week at 73.4.

The bitcoin price is now at US$33,057 and up 3.0% from this time Saturday. Volatility in the past 24 hours has been very high at +/- 4.2%.

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.