Source: Poundsterlinglive

Australia’s Q3 National Accounts disappointed expectations with GDP up just 0.3% (0.8%yr) as the gap between public and private demand widened – the latter now stalled for six months. While partly explained by the ‘reallocation’ of electricity spending by households to the government through energy rebates, the majority of the divergence comes as a consequence of prolonged weakness in real incomes, elevated interest rates and a historically-high tax burden. Highlighting the cumulative impact on the economy, Q3 marked the sixth consecutive quarterly decline in per capita GDP, the longest (but not deepest) contraction since the 1950s, when official records begin. In this week’s essay, Chief Economist Luci Ellis considers the consequences for productivity and monetary policy.

Looking into the detail of the National Accounts, it is hardly surprising that the primary contributor to the Q3 surprise was household consumption, flatlining in Q3 to be up just 0.4% over the year. The underlying picture for real household disposable incomes was more constructive owing to the stage 3 tax cuts and disinflation, but the 0.8% gain was saved not spent – a result foreshadowed by the Westpac Consumer Panel. On current data, the latest updates on retail sales and experimental measures of household spending point to a solid lift in consumption in October, but our measure of card activity cautions that shifting seasonal patterns around end-of-year discounting are likely to distort affected monthly reads, as occurred last year. Looking to 2025, income and saving dynamics stand as significant headwinds for the recovery in consumption growth.

The external sector also provided little support for GDP in Q3, the current account deficit narrowing slightly from a materially downwardly revised figure of –$16.4bn to –$14.1bn in Q3. The terms of trade are still elevated but have fallen back over the past year; export volumes are also struggling as import volumes gain steadily, albeit recently at a slower pace. While net exports have added 0.1ppts to growth in both Q2 and Q3, prior weakness saw the external account subtract a percentage point from GDP growth over the year.

Before moving offshore, it is worth noting that the latest CoreLogic data highlighted a broadening in the nascent slowdown in Australian house price growth. Affordability is increasingly a concern across the capitals – price growth slowing in Perth, Adelaide and Brisbane, as buyers lower their expectations, and in outright decline in Sydney and Melbourne, where many would be buyers have been priced out. Supply remains critical for the affordability outlook; encouragingly, the firming uptrend in dwelling approvals is coinciding with tentative evidence of easing supply constraints for construction, balancing the risks around the pipeline. For more detail on our views around the housing market, see our latest Housing Pulse on Westpac IQ.

Ahead of tonight’s employment report, data received for the US continued to support a 25bp cut at the FOMC’s December meeting.

JOLTS job openings rose from 7.4mn to 7.7mn in October, reversing September’s decline. Looking through the monthly volatility, the trend remains consistent with a labour market that is slowly decelerating from a starting point broadly consistent with the pre-pandemic experience – when both wages and inflation were benign. The FOMC’s December Beige Book provided further evidence of labour market balance with some glimpses of downside risks, employment characterised as “flat or up only slightly across Districts” and wage growth having “softened to a modest pace”. Unsurprisingly, on inflation, prices were said to have risen “only at a modest pace… [and] Both consumer-oriented and business-oriented contacts reported greater difficulty passing costs on to customers”.

The ISM services survey corroborated the above view, the headline PMI falling from 56.0 to 52.1 in November and employment weakening from 53.0 to 51.5, both outcomes well below their five-year pre-COVID averages but still expansionary. The ISM manufacturing survey in contrast shone the spotlight on downside risks, the headline and employment indexes well below average at outright contractionary levels. The prices paid measures meanwhile remained consistent with consumer inflation at target. Altogether, this week’s data supports our expectation of a 25bp cut from the FOMC at their 17-18 December policy meeting. Tonight’s employment report and the upcoming November CPI report will inform on the risks to this view and the outlook for policy in 2025. Chair Powell and other recent FOMC speakers have made clear their policy decisions will be made meeting-by-meeting in a data and risk dependent manner.

Source: ACTIONFOREX

(Dec 6): President-elect Donald Trump has promised to impose 10% tariffs on all imports from China as soon as he takes office next month.

But that might be difficult to achieve fully because tens of billions of dollars worth of goods will probably escape those import taxes due to loopholes and undercounting of how much is actually arriving from China.

In recent years, some experts have pointed out a widening gap between US and Chinese trade data that they believe is driven by three factors: the “de minimis” tariff loophole, an underreporting of the value of imports by US importers eager to reduce the cost of tariffs and over-reporting by Chinese exporters eager to maximise tax rebates.

The anomaly has appeared in global trade data from early 2020, when China started to say it was selling more goods to the US than America reported buying from the Asian manufacturing behemoth. The gap has grown steadily since and at US$64 billion (RM282.83 billion) in the first 10 months of this year it’s on track to exceed the record set last year.

The upshot: Not only will tens of billions of dollars worth of shipments likely avoid Trump’s tariffs, but the US data also downplays just how dependent US businesses and consumers remain on trade with China.

“Distorted trade data may prevent US policymakers from designing effective trade and supply chain policies,” according to the most recent report to Congress from the US-China Economic and Security Review Commission.

The US under-reported imports from China by about 20%-25% last year, according to Adam Wolfe of Absolute Strategy Research, who gave testimony to the Commission. He estimates that up to US$160 billion of imports from China didn’t get counted last year, mostly due to US importers avoiding tariffs by under-reporting or misreporting their purchases.

De-minimis loophole

Another factor causing the data gap is the “de minimis” rule, which means that small packages valued at less than US$800 don’t get counted or tariffed by the US. American shoppers and companies imported about US$48 billion worth of shipments from the world under that loophole in the first nine months of this year, according to US Customs and Border Patrol estimates.

Much of that is likely from China, with low-cost shopping apps like Shein and Temu seeing strong growth in the US in the past two years.

Chinese data shows more than US$17 billion worth of shipments to the US of ‘articles of low value in simplified customs procedures’ in the first 10 months of this year, above the total for the whole of 2023. That’s set to rise, with both Shein and Temu seeing US sales and customers reaching record highs in November, a month powered by the Black Friday shopping spree.

Sales on the Temu platform in the US in November jumped 31% from a year ago, while Shein had a 20% year-on-year expansion in US sales, according to data from Bloomberg Second Measure, which analyses consumers’ card transactions.

The administration of President Joe Biden said in September that it would narrow that loophole, but hasn’t released any details as to how or when, and it is unclear if that will continue under Trump.

De minimis shipments account for 11% of China’s exports to the US, according to research from economists at Nomura Holdings Inc, who this week estimated a 1.3 percentage point hit to export growth and a small reduction in China’s gross domestic product expansion if these were totally banned.

Another explanation of part of the trade data gap comes from the other side of the Pacific. Federal Reserve economists noted in a 2021 report that Chinese companies have over-reported exports to get larger tax rebates.

Between March 2020 and the end of 2021, more than 90,000 companies in the nation enjoyed almost 38 billion yuan (US$5.2 billion or RM23.13 billion) in export tax rebates, according to state media. Beijing moved to limit that last month, cancelling rebates for copper and aluminium and lowering them for some refined oil, solar, battery and non-metallic mineral products.

It’s difficult to pin down the precise contribution of each of these factors, but “the growing, sizeable gap between US and China trade data has important implications for our understanding of what Trump’s first trade war accomplished when it comes to reducing US dependence on China,” said Nicole Gorton-Caratelli of Bloomberg Economics.

Trade diversion

The Trump administration will also have to deal with the increase in Chinese goods making their way indirectly to the US via other manufacturing hubs such as Vietnam or Mexico.

New research from Bloomberg Economics shows that while both the US and China report having diversified their trade from each other, the US continues to be the largest single destination for Chinese manufacturing value-added.

“Chinese value-added is still entering the US — it’s just entering via other countries,” Gorton-Caratelli and Gerard DiPippo of Bloomberg Economics write.

Taken together, the data show that claims the US has lowered its trade dependence on China are premature at best.

“The US has not de-coupled from China in any significant way,” according to Absolute Strategy Research’s Wolfe. “Higher tariffs are likely to lead to more tariff avoidance, not de-coupling.”

Source: Theedgemarkets