Daily Brief Macro: China: A Perfect Storm in the Making and more

In today’s briefing:

China: A Perfect Storm in the Making

High frequency data for June showed some signs of improvement but the economy continues to struggle under multiple stresses. The present malaise goes beyond zero-Covid policies.
Covid-19 restrictions are hurting consumer morale and undermining SMEs; local government finances are strained; real estate is under duress; and the economic slowdown is percolating into financial and social stresses.
Stimulus measures will be stepped up to boost the recovery in 2H22, but strained government finances and policy constraints put the effectiveness of stimulus into question.

A RMB7.96tn (US$1.2tn) increase in TSF in May-Jun’22 (US$3.1tn in H1CY22) boosted FAI and industrial growth in Jun’22, helping avert a Q2 GDP contraction. Full-year RGDP growth won’t exceed 4%.
Exports accelerated but imports were near-stagnant, contributing to a trade surplus of US$391bn in H1CY22– but FX reserves still declined US$179bn. Easing options are limited by fear of capital flight.
Falling home sales, weaker property values and tighter global liquidity will spread the current financial crisis to more provinces. With monetary easing constrained, China’s financial system crisis will deepen.

UK inflation was a tenth above forecast as it rose to 9.4% and 11.8% on the CPI and RPI, with the news concentrated on food prices (“core” was as expected).
We extend the upside trend in food prices, bolstering the forecast, but keeping it relatively flat until 2023 outside the Oct-22 energy-related increase.
The BoE says it focuses on evidence of increased inflation persistence rather than its spot prints. Underlying measures eased again in June, albeit staying too high.

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