Markets are closing all over Asia Pacific so it’s time for me to step down. My colleagues in London will soon be starting a business blog from the northern hemisphere so check in with them to find out how the markets react to the latest Brexit shenanigans and all the potentially very good news about Hong Kong pulling its extradition bill.
These were the highlights today:
- Australia recorded its weakest annual growth since 2009 with national accounts figures indicating expansion of 1.4% in the 12 months to the end of June.
- Stocks in Hong Kong have soared on reports the bill that sparked weeks of protest will be withdrawn.
- Hong Kong’s economy earlier moved closer to recession as a survey showed that business activity collapsed in August.
- China’s service sector buoyed Asian markets after the Caixin PMI showed activity at a healthy 52.1 in August.
- Sterling recovered some ground overnight, climbing to $1.211 after plummeting to a 33-year low on Tuesday amid Brexit chaos.
- The Shanghai Composite was up 0.48% at 1,972 points, while the Nikkei has risen 0.12%. In Seoul the Kospi jumped 0.35% to 1,972 points.
- The ASX200 rallied to close up 24 poiunts, or 0.31%. The Aussie dollar did well too, up 0.26% to US67.75.
Thanks for joining me.
Hang Seng jumps on reports Hong Kong extradition bill to be pulled
The Hong Kong market has jumped 3% after the South China Morning Post reported that the government is withdrawing the controversial China extradition bill that sparked weeks of protest.
Big turnaround for the ASX200 which has closed up 24 points or 0.31% at 6553 points.
The Nikkei is done for the day and has finished up 24 points, or 0.12%, at 20,649 points.
The Kospi has also closed and is up seven points, or 0.35%, at 1,972 points.
And here are the opening calls for Europe.
For an in-depth examination of the GDP numbers, look no further than this column by my colleague Greg Jericho. He argues that but for government consumption the economy would have turned negative. He also points out that we’ve had four straight quarters of economic growth below trend – the first time that’s happened since the 1990s.
Time to check up on the scores around the grounds.
- Despite the city’s nosediving economy, investors in Hong Kong were in good cheer today and have pushed the Hang Seng up by 1.32% to 25,864 points.
- The Shanghai Composite was also up 0.34% at 1,972 points, while the Nikkei has risen 0.18% to 20,663.
- In Seoul the Kospi jumped 0.35% to 1,972 points.
- The ASX200 is off 0.48% at 6541 points.
- Gold is down 0.2% but still near six-year highs at $1,543.02 per ounce
- Brent crude is up 12c, or 0.21%, at $58.38
- The FTSE100 is seen rising 0.35% at the opening later today
My colleague in Hong Kong, Verna Yu, has been having a longer look at the shocking economic data from the crisis-torn territory released earlier today showing that business activity has collapsed in recent weeks.
She writes that the city is on “the verge of recession” after a survey of business activity showed a reading of 40.8 for August – the lowest number ever recorded in the history of the series. Growth was already slowing before the protests started – the economy shrank 0.4% in the three months to June – so a second successive month in the red seems certain.
Here’s the full story:
The global slowdown has another obvious effect – the price of gold is on the rise and heading towards a six-year high.
Although it dipped slightly in Asian trade by 0.2% to $1,543.02 per ounce, it is hovering near last week’s $1,554.56, its highest since April 2013.
Tuesday’s poor US manufacturing data, the trade war and Brexit have all combined to push up the price.
Benjamin Lu, analyst at Phillip Futures analyst in Singapore, said in a note.
“Rising US rate cut expectations over lacklustre economic data will boost bullion appeal as traders ease up on US dollar strength.
The trade war between the US and China is usually blamed for the slowing world economy and problems we’ve seen in economies such as South Korea, Hong Kong and even Australia.
But as this thread from Natixis economist Trinh Nguyen explains, the slowdown was already under way thanks to the rising US dollar and China’s decision to rein in its gigantic credit bubble, setting off a credit crunch in emerging markets.
Responding on Twitter to a claim that the trade war has caused the yuan to devalue, she says that “it is the slowdown of the Chinese economy due to massive rise of credit & now credit is slowing & so the world is living with limited sources of growth. Trade-war just tips that China slowdown which was inevitable. Have people forgottten about the massive leveraging”.
The bit in bold is crucial. Just as China refloated the global economy after the Lehman crisis, now it is trying to deflate the bubble by slashing back credit. Australia’s recent iron ore bonanza could be one of the last hurrahs if this is correct.
Economy showing 'remarkable resilience', says Frydenberg
The treasurer, Josh Frydenberg, has described the GDP figures as a sign of the “remarkable resilience” of the Australian economy.
Seeking to find an upbeat note on the weak numbers, Frydenberg repeated the standard government line of the past few days by saying the data did not take into account the full effect of the federal income tax cuts and the central bank’s 50 basis points worth of interest rate cuts.
It’s a reminder of the remarkable resilience of the Australian economy and a repudiation of all those who have sought to talk it down. The fundamentals of the Australian economy are strong.
However, he said the government was looking at ways of boosting the economy, as requested more than once by RBA chief Philip Lowe.
We are having a discussion with key stakeholders about other ways we can boost investment, and those decisions will be decisions at budget time.
The Australian Council of Social Service has called on the government to increase the Newstart allowance in order to stimulate the Australian economy.
“The government can effectively work to boost the flagging economy by acting on poverty and homelessness,” Acoss director of policy Jacqueline Phillips said. “An increase to Newstart would immediately boost the economy by providing stimulus where it is needed most, including in struggling regional communities.
“People on Newstart have to spend every cent in order to get by – they don’t have the option of saving – so an increase to Newstart would immediately stimulate the economy while supporting people to get through tough times.”
Sterling climbs back from 33-year low
The British pound has continued to climb back from a 33-year low overnight to the dizzying heights of $1.2107 thanks to the Commons defeat inflicted on Boris Johnson.
Traders are betting that the success of Tory rebels and opposition MPs in seizing control of parliamentary business might succeed in taking no deal off the table.
Sterling had plunged to $1.1959 earlier in the day. It hadn’t been below $1.20 since 1985 – apart from the day of a “flash crash” in October 2016.
You can catch up with how the UK papers are treating Johnson’s night of ignominy with our roundup here:
More reaction in Australia where there is a nationwide hunt for the gloomiest way to cast this morning’s GDP figures.
The consensus is that the annualised rate of 1.4% is the worst since September 2009. But to find a figure worse than 1.4% you have to go back in time to 2000 when growth bottomed out just above 1%.
Ben K Jarman from JP Morgan writes:
Looking ahead, government consumption is likely to remain supportive in the medium term given spending commitments outside defense, while real exports are somewhat supply constrained and facing a deteriorating global demand backdrop. Capital spending looks to be improving in some pockets (e.g. mining and health-related sectors), but the upside for plant and equipment spending overall is limited by weak business profitability, and we expect any such improvement will be largely offset by moderation in public spending projects, and sharp outright declines in home building.
This leaves household consumption as key for the growth outlook into 2020, and as articulated by RBA officials, this is also the area of greatest uncertainty for the forecasts, given the pull from balance sheet drags and push from still-decent labour income growth.
New car sales down 10.1% in Australia
New car sales have fallen again in Australia in another sign of weak consumer demand.
The number of vehicles sold in August month was down 10.1% compared with August 2018, according to the country’s peak motor industry group. It follows a fall of 2.8% in July, the Federal Chamber of Automotive Industries (FCAI) said.
“There’s no doubt it is a very tough market at the moment. And despite the best efforts of the industry, the decrease in sales continues,” FCAI boss Tony Weber said after the group catalogued the 17th consecutive month of declines.
Outside Australia, stock markets have bounced thanks to the strong service sector data from China.
The Shanghai Composite index was up 0.45% this morning and they’re loving the numbers in Hong Kong where the Hang Seng is up 1.48%.
That might help them forget how bad the local PMIs were earlier, which showed a record low reading for business activity of 40.8 in August. The crisis-torn territory looks certain to head into a full-blown recession after recording growth of -0.4% in the June quarter.
Elsewhere, the Nikkei is flat, as is the Kospi in Seoul. The ASX200 is down 0.6% at 6,533.
Futures trading shows that the FTSE100 and the Dow Jones will open in positive territory later today.
Craig James, chief economist at CommSec, says Australia’s record economic expansion has entered its 29th year.
If you are under the age of 45 you probably have never experienced a recession in your working life. Remarkable. The current US economic expansion is also a record. But it has extended for 10 years rather than 28 years. Australia’s record economic expansion is now in its 29th year. In fact there has been 33 consecutive quarters of consecutive economic growth (over eight years without a negative result).
Dr Sarah Hunter, chief economist for BIS Oxford Economics, has a similar copnclusion to the folks at Capital, pinpointing stagnant wage growth as a factor in curbing GDP.
While there will be some support for households from the cash rate and tax cuts, weak income growth will fundamentally constrain spending in the near term (the savings rate actually dipped down slightly compared to the March quarter). And the residential construction downturn has much further to run – activity levels are likely to continue declining until at least 2021. The positive contribution from net exports is also likely to fade (though remain positive), with the ramp up in LNG exports set to taper off.
However she makes the point that although growth might not be spectacular in quarters to come, the annualised figure will look better because the weak numbers from December 2018 (0.3%) and March 2019 (0.3%).
Overall, growth is likely to remain relatively subdued until the early 2020s. But the June quarter is likely to be the trough for the y/y growth rate – the economy grew by just 1.4% y/y from June 2018 - as the very weak quarters from late 2018 and early 2019 drop out of the calculation.
'Debt hangover means flat growth,' says Capital
Capital Economics has given its initial verdict on the GDP numbers. They reckon growth won’t pick up much in the next quarter, despite what the government is saying, because iron ore exports won’t be able to contribute as much.
Marcel Thieliant , senior Australia & New Zealand economist, said:
GDP growth held steady in the second quarter but the hangover from high household debt suggests growth will stabilise rather than pick up much further over the coming quarters. The 0.5% q/q increase in GDP in the second quarter was in line with the Bloomberg median and resulted in annual GDP growth of just 1.4%, matching the low reached during the global financial crisis. And because GDP growth in the first quarter was revised up, it meant that quarterly growth held steady in Q2. The 0.6 percentage point boost from net trade in part reflects the unwinding of supply disruptions to iron ore in the second quarter and a much smaller contribution in the third quarter is likely. However, inventories are unlikely to keep knocking off 0.5 ppt from quarterly growth as they did last quarter.
China's service sector expands
Activity in China’s services sector rose at its fastest pace in three months in August as new orders rose, according to the latest PMI survey today.
The expansion saw the biggest increase in hiring in over a year, the private Caixin/Markit services purchasing managers’ index (PMI) showed.
The PMI picked up to 52.1 last month, the highest since May, compared with July’s 51.6. The country’s manufacturing sector contracted in the same period, figures released at the weekend showed.
The Australian GDP figures will heap more pressure on the Reserve Bank to cut rates. Its forecasts for the second quarter said the economy would grow by 0.75%, with an annualised rate of 1.7%. So it’s missed by a bit of a distance.
The Reserve Bank governor Philip Lowe yesterday opted to keep rates on hold and said in his statement after the bank’s monthly meeting that that he thought that rising house prices might give a bit of a boost to household consumption, one of the areas of the economy that is weakest.
Two rate cuts and tax cuts since the May election suggest there might be some boost in the pipeline but consumers are so far using any extra cash to pay off debt and are not spending, as yesterday’s poor retail sales figures showed.
Others think the RBA deserve a pat on the back for managing the economy successfully through an asset bubble bust.
The ASX200 has stayed broadly falt throughout the GDp excitement, and sits 47 points off at 6.525.
The Aussie dollar is up again at US67.78 as traders see the results as encouraging for the economy.
Labor’s Jim Chalmers is quick out of the blocks to highlight that these are the worst annualised numbers for GDP since September 2009, when the world was still in the middle of the financial crisis.
Household consumption and business investment and inventories were the biggest drags on growth, the release by the ABS shows.
This is a handy graph explaining what the breakdown was:
Slowest annual growth since September 2009
The annualised growth rate of 1.4% is the lowest recorded since the September quarter in 2009.
Although the quarterly rate came in at a slightly better than expected 0.5%, that annual rate will be the one that gets all the attention.
Australian economy grows at 0.5% in the second quarter
The economy grew by 0.5% in the second quarter, making a yearly rate of 1.4%
We’ve had a range of forecasts for GDP from minus 6 (Credit Suisse) to plus 7 (Stephen Koukoulas) on the quarterly rate.
So what will it be ...
Less than 20 minutes before those GDP numbers. Most forecasts are expecting a number of around 0.4%, month on month, and 1.4% for the yearly rate.
We’ve already had Scott Morrison saying earlier that he expects the growth rate to improve as tax cuts and interest rate cuts take more effect later in the year, giving his government a bit of relief.
But while iron ore and coal exports may have shored up growth this time, commodity prices are dipping again and therefore revenues might not come to the rescue in the September quarter.
We’ll turn the focus on to Australian GDP in a minute, but another pretty shocking statistic from Asia this morning: sales of Japanese cars to South Korea fell 57% in August compared with a year before.
It follows a consumer boycott of Japanese goods in a growing diplomatic row about the legacy of the second world war.
Toyota Motor Corp’s South Korean sales fell 59% in August from a year earlier, while Honda Motor’s local sales tumbled 81%.
The forecasters at Capital Economics wrote last week that Hong Kong was, by their reckoning, already in recession. Evidence was provided in Friday’s figures on tourist arrivals, which were down 12% in July compared with June.
That was the biggest drop in 10 years, apart from one odd month in 2015 that saw an unusually big swing around Chinese New Year. With violent street clashes worsening since then, August’s figures are likely to be even worse. Retail sales volumes fell another 4% in July after a 5% fall in June.
Chief Asia economist Mark Williams wrote:
With spending by residents and tourists in sharp decline, and the trade war not going away, we think Hong Kong’s economy is in recession.
Hong Kong manufacturing activity shrinks to lowest on record
Hong Kong is surely heading into a recession, if it’s not already there.
The city’s manufacturing sector has recorded its lowest activity reading ever in Ausgust, according to the just-released PMI survey, as it struggles with its biggest political crisis since the handover in 1997.
Japan’s service sector expanded in August, providing some better news for stock markets gripped with fears of a global downturn.
The final Jibun Bank Japan services purchasing managers’ index (PMI) rose to 53.3 from 51.8 in July on a seasonally adjusted basis, marking the fastest growth since October 2017. The final gauge was slightly lower than the 53.4 reading released in the flash PMI on 22 August. A reading below 50 marks contraction.
The Nikkei is still in the red, however, with a loss of 64 points, or 0.34% this morning to stand at 20,555.
Chinese services PMI is due in about an hour.
If you think the Australian economy is struggling, take a look at Britain.
Amid the prospect of a do-or-die general election to decide the fate of Brexit, the pound fell to its lowest point for three years overnight. Sterling slumped as low as $1.1959 at one point on Tuesday before recovering some ground. It’s now at $1.209.
Here’s how it has fared this year as the Brexit process has staggered from bad to worse.
And if you want to catch up with all the machinations, including how Boris Johnson lost his first vote as PM, follow our live blog here with my colleague Kate Lyons:
Banks are leading the way down in Sydney with the ASX Financials index down more than 1.1%. Westpac is the worst performer of the big four banks, off almost 1.3%.
Also among the biggest fallers is the building products group, CSR, which is off 5%.
The Aussie dollar is up around 0.13% at US67.65c.
ASX200 opens down
The ASX200 is down this morning by around 0.9% – a fall of almost 60 points to 6,514.
So too are stocks in Japan and Korea where trading is also under way.
The word that you won’t catch the PM saying is recession. We’re not there yet in Australia, of course, because you need two successive quarters of negative growth to register an official recession*.
But awareness of the idea is increasing across the country, which hasn’t seen this beast for 28 years. Data produced by the realtime media monitoring firm Streem reveals how use of the word recession has increased 610% over the past year in stories about the Australian economy.
It also shows that use of the term “trade war” is five times what it was a year ago, with China now mentioned in nearly half (43%) of stories about the Australian economy. The use of positive adjectives like strong or healthy or grew to describe factors in the economy is down 15% year on year. Negative terms like weak or negative are up 167%.
*We do have a per capita recession though.
Morrison refuses to rule out rethink on surplus
My Canberra colleague Paul Karp has this on Scott Morrison’s comments this morning ahead of what are expected to be poor GDP figures:
The PM has told 3AW Radio it was “ridiculous” to argue tax cuts had failed to stimulate the Australian economy, noting that the GDP figures relate to the June quarter and tax cuts won’t show up until the September quarter.
Morrison also refused to rule out altering plans for a budget surplus but - before the release of GDP figures - he said he is “not seeing anything at the moment” that would force reconsideration and the Coalition plans to “stay the course”.
What I’ll do is continue to monitor the implementation of our plans. I’m not surprised by the difficulties we’re seeing at the moment. When we put the budget together in May I said we should cut taxes, we should spend more on infrastructure, we should invest more in skills transitioning. I said we need to keep the rate of jobs growth running, which is above what our budget estimated, and we’ve seen record employment growth.
Morrison said the surplus “provides an important guard-rail for our economic decision-making”, vowing not to “recklessly rack up debt”.
We will carefully and soberly look at what’s happening in the economy. We’ve got plans that we put in place in the budget to deal with exactly the situation we’re talking about now, and we’ll watch those programs ... I’m not seeing anything at the moment which would ... draw that question to our consideration. I don’t believe it is [on the table]. We’re putting the budget in a much stronger position - this is the first budget surplus year we’ve been in for 12 years. I know Labor and others are so quick to throw away those gains ... at the first breath of wind. Our government won’t do that - we will stay the course, we will be consistent, we will be measured, we will be reasoned.
My colleague Ben Butler has been looking at what’s in store on the markets this morning:
Australia’s market is set for a fall this morning no matter what GDP figures reveal after international markets fell overnight.
The tech-heavy Nasdaq led falls overnight, dropping 1.1%, while the other main US index, the S&P500, fell almost 0.7%. The Dow Jones industrial average finished down 1.08%.
Amid political turmoil in Britain the FTSE finished flat after early gains were drained away over the trading day.
The ASX is set to open about 0.6% lower this morning, according to futures market data.
Good morning and welcome to the business live blog.
The big event today is the release of Australian gross domestic product figures for the second quarter of the year. The number is widely expected by forecasters to come in at 0.4%, with an annualised rate of 1.4%. This would represent close to Australia’s worst economic growth for a decade and would pile pressure on the government to explain away such weak growth after their six years in power. Scott Morrison has been speaking about this already today so we’ll have some of his words very shortly.
The figure was shaping up to be much worse until yesterday’s healthy export figures that showed Australia’s first balance of payments surplus for 44 years helped by soaring iron ore prices. Strong government consumption numbers also helped to offset weak construction and household demand, as manifested by a 0.1% slump in retail sales in July.
On the markets, the ASX200 is set to fall after sharp losses on Wall Street overnight. More on that soon too.
The Aussie dollar rebounded overnight and is buying US67.58c from US67.25c on Tuesday.
We also have snapshots of the Japanese and Chinese service sectors later this morning – 10.30 and 11.45 respectively. The Chinese number will be intersting to see if services can offset a big slowdown in the country’s manufacturing sector.