Don't panic but it sure ain't pretty warns HSBC on China

Analysts say economic numbers and third quarter growth may turn out to be the weakest this year, but it's not as nasty as we think.

In a recent report of HSBC Research on Friday, analysts say momentum is slowing, which can be attributed to the fading restocking bounce and the gradual withdrawal of fiscal stimulus.

In Asia, growth will now rotate to private demand, with consumption already ramping up, and private capital expenditure beginning to accelerate as well. This rotation process will inevitably be associated with volatile economic numbers and third quarter growth may well turn out to be the weakest in a year.

“But, don’t panic: growth will re-accelerate into year-end once the rotation is complete. It may not be pretty, but it’s not as nasty as many are starting to think,” warned HSBC Research.

After soaring over the first five months of the year, activity in Asia has started to level off. Korea’s bumper export number for June was up 4% month-on-month.

“But, the PMI’s are clearly pointing south and Asia’s lead indicators have turned the wrong way as well. As growth rotates to private demand in Asia, expect a couple of months of less stellar data.”Let’s start with the big picture. Chart 1 shows our weighted G3 PMI series (for the US, UK, and the Eurozone) along with our Asian Business Index (ABI), a composite of all available national PMIs. Clearly, both have come off sharply. But, they are also both still firmly in expansion territory. Trends matter, of course, and the turn has been unusually sharp by historical standards. However, for now, we are well above levels when the bust of Lehman brother brought the global economy to a stand-still.

According to the report, the biggest shocker can be June’s PMI crop with HSBC’s China index from dropped from 52.7 to 50.4, barely above the critical threshold of 50. However this is still historical as the index is consistent historically with industrial production growth of around 12-13% year-on-year.

The weaker PMI readings point to a sharp deceleration of export growth after an unsustainably strong pace over the last six months, the analysis further said. The fall in the new order component of ABI may suggest a slowdown in shipments over the coming two months. Still, another useful lead indicator for Asian exports, the difference between new orders and existing inventories in the US ISM survey, is still holding up.

“Thus, we not panicked just yet about Asia’s export outlook, although, as we have warned for two months now, the data flow will get quite challenging over the coming quarter.”