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Demand Up, Output Up, Inflation Up

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Global Economics – August 14, 2020

Introduction

The week’s economic news was mostly good, perhaps very good. Retail sales continue to recover across countries, including China and the US, as does industrial production. What is also improving is inflation which is moving up from lows. For policy makers these results may bring forward the delicate moment, or at least the consideration of that moment, when a cut-back in stimulus will need to be signaled.

The Global Economy

Demand and supply

Chinese retail sales continued to improve in July, up a sizable 0.85 percent on the month though less sizable than 1.34 percent in June. Sales are still recovering from the virus shock at the beginning of the year, though the gap is narrowing as year-over-year contraction, as tracked in the red line of the graph, moved closer to the zero line, 7 tenths better to minus 1.1 percent. Amid reports of heavy dealer discounting in response to heavy inventories, July sales were driven by strong spending on autos.

Elsewhere, however, July’s results were less impressive as growth slowed for home appliances, household non-durables, clothing, and communications equipment. Chinese industrial production, outpacing retail sales, has been benefiting from foreign markets though growth did ease in July by 0.4 percent to trim the year-over-year rate by 3 tenths to what is still, as tracked in the graph’s black line, a solidly positive 4.8 percent. And manufacturing output, the key component of the report, accelerated solidly with yearly growth up 9 tenths to a very strong 6.0 percent. The accompanying graph also tracks the blue columns of house prices, one economic measurement that has withstood the virus as it has across the major economies. This index edged 1 tenth lower in July to year-over-year growth of 4.8 percent compared to growth of 6.6 percent in China’s pre-virus month of December.

Chinese retail recovery

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