Economics17 April 2013
Paul Bloxham | +61292552635 | PAULBLOXHAM@HSBC.COM.AUView HSBC Global Research at:http://www.research.hsbc.comIssuer of report: HSBC Bank Australia Limited
Australian Economics Comment
China recovery modest, but infrastructure strong
This week brought news that China's recovery has been more modest than expected. Q1 GDP rose by 7.7% y-o-y, onlymodestly up from its 7.4% trough in Q312. As a result, our team have revised down their forecasts for China's growthrecovery in 2013, from 8.6% to 8.2%. But importantly for Australia, despite weaker overall growth, infrastructurespending is still going strong. Indeed, in response to the modest recovery, there may be greater fiscal spending oninfrastructure yet, supporting commodity demand. We maintain our above-consensus forecasts for Australian GDPgrowth of 2.9% this year.
This week's Chinese GDP numbers for Q1 were a downside surprise for everyone. Our China economist's put it down to twomain factors: weak global demand and a lack of Chinese policy coordination, as a result of the leadership transition. Strippingout exports to Hong Kong, which our team thinks were artificially inflated, exports growth was only modest in the quarter.Retail sales and property investment also slowed, as policymakers tried to rein in 'extravagance' and put clamps on the propertysector.But importantly for Australia, infrastructure investment remained strong. Indeed, the March numbers showed acceleration ininfrastructure spending from 23% in January/February to 27.6% in March.As a result of the weaker than expected numbers, our team have revised down their forecasts for 2013 from 8.6% to 8.2%. Thisis still a pick-up in growth from the 7.8% recorded in 2012, but a more modest rise. The team have also knocked a little off ourforecasts for Hong Kong and Taiwan. For more details, see 'Greater China Economics', 15 April 2013, link below.A simple rule of thumb would imply that this downward revision might knock around 0.1-0.2ppts off the forecasts forAustralian growth, given around 30% of Australia's exports go to China (around 70% go to Asia as a whole). But thecomposition of China's growth matters too. The bulk of Australia's exports are commodities and commodity demand fromChina is largely for infrastructure investment, which remained strong.In addition, our China economists see a risk that we may see a pull forward of more infrastructure investment, in response tothe weaker than expected recovery. We still see significant scope for further investment in China, particularly in railways andsubways, which should provide support for hard commodity demand (see 'China economic spotlight: Toys, trains and capital',15 April 2013, link below). Providing a broad and simple cross check for the infrastructure story, iron ore spot prices havestayed above USD130 a tonne for the past month, despite the weaker Chinese GDP numbers and sell off in other commoditymarkets.Australia's story is also not just about China and commodities. While that has been the biggest story in recent years, wesee early signs that Australia's growth is beginning to rebalance, with low interest rates supporting a recovery in housingconstruction, a pick-up in housing prices and a retail revival. Keep in mind that the mining sector is less than one-fifth of theAustralian economy, with many of the other sectors of the economy highly sensitive to interest rates.