Chief economist update: The Middle Kingdom's middling growth

It's the first Tuesday of November - the time when the "Melbourne Cup" runs and the Reserve Bank of Australia (RBA) meets only a few hours apart.

All bets are on! There are so many odds on the various horses running in the Cup but there's only one on the RBA: It'll keep the official cash rate unchanged at 1.5% - as it was last month, last year and going all the way back to the first Tuesday of August 2016 when it dropped interest rates from 1.75%.

The RBA is stuck between positive growth fundamentals - GDP expanded by 3.4% in the year to the second quarter (the fastest in six years) and the unemployment rate dropped to 5.3% in September (also the lowest in six years) - and negative inflation indications - all CPI measures fell below the low end of the RBA's 2%-3% target band in the September quarter and wages growth remained stagnant.

Speaking of stagnant, China's economy appears to be heading there. Being Australia's biggest export market, what happens in the economy of the Middle Kingdom will flow through into ours. Austrade data shows we shipped 29.6% of our total exports to China in FY 2016/17. In turn, exports account for more than 20% of the Australian economy (World Bank data).

So what's happening in China? While Chinese GDP growth slowed from 6.7% in the second quarter to 6.5% in the third quarter is right bang on central command's target, Caixin's latest Purchasing Managers' survey indicate that the economy could be heading for stagnation.

According to Markit Economics/Caixin: "The Caixin China Composite Output Index dipped to 50.5 in October from the previous month, reaching its lowest level since June 2016, indicating mounting downward pressure on China's economy. The subindex for new orders fell, pointing to softening overall demand conditions. The employment subindex edged up despite staying in negative territory, which could possibly be due to government efforts to stabilise the labor market. The subindex for input costs remained unchanged from the month before, while the one for output charges inched up, indicating easing pressure on company profit margins - though upward price pressure remained. The subindex for future output edged down, reflecting weakening confidence among companies."

The composite output index is derived from indications in the manufacturing and services sectors.

The manufacturing PMI improved ... but only just - rising to a reading of 50.1 in October from 50.0 in the previous month - prompting Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group to comment that: "Overall, expansion across the manufacturing sector was still weak. Production and business confidence continued to cool despite stable demand. The pressure on production costs didn't ease. China's economy has not seen obvious improvement."

The service sector fared worse with its PMI dropping from 53.1 in September to a 13-month low of 50.8 last month. Not only that, Caixin also reports that: "The subindex for new business dropped to its lowest point since November 2008, despite staying in expansionary territory, indicating an obviously weakening demand for services."

All up: "Although Chinese companies remained upbeat towards the 12-month business outlook in October, the level of positive sentiment fell across both manufacturers and service providers. At goods producers, optimism descended to an 11-month low, while service providers signalled the weakest level of confidence since July. Concerns over subdued demand conditions and the impact of the ongoing China-US trade dispute were key factors weighing on sentiment at the start of the fourth quarter."

The recent draft tax cut proposal (slated to take effect in January next year) should help revitalise domestic demand but the China-US trade dispute solely depends on Trump.

Read more: Middle KingdomPurchasing ManagersAustradeCaixin China Composite Output IndexCEBM GroupCPIDirector of Macroeconomic AnalysisDr. Zhengsheng ZhongFYMarkit Economics/CaixinMelbourne CupReserve Bank of AustraliaTrumpTuesday of AugustTuesday of NovemberWorld Bank
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