Economic recovery continues in China

Daniel Richards - MENA Economist
Published Date: 19 October 2020


China recorded real GDP growth of 4.9% y/y in the third quarter, just missing expectations of 5.2%, but a concerted rebound from the coronavirus nonetheless. What was particularly reassuring is that retail sales in the third quarter turned positive, rising 0.9% compared to the year earlier. To date, the recovery in consumption levels has been a definite laggard as compared to industrial production but has accelerated recently, with retail sales up 3.3% y/y in September. Industrial production continues to lead the recovery however, expanding 5.8% y/y in Q3, 6.9% in September.

The inverse has been the case in the US, with data released on Friday showing that the dual-speed recovery continues, with consumption bearing up far stronger than production. Headline retail sales rose 1.9% m/m in September, far exceeding expectations of 0.8%, while retail sales ex autos and gas rose 1.5% m/m. The University of Michigan consumer sentiment survey also beat consensus projections, coming in at 81.2 compared to 80.5. On the other hand, manufacturing sales declined -2.0% m/m, while industrial production was down -0.6% m/m in September, missing expectations of 0.5% growth. On Thursday, the Empire manufacturing survey for October was at 10.5, down from 17.0 in September and below expectations of 14.0. The question is, can this consumer strength be maintained in the face of rising coronavirus infections and a lack of progress on a new fiscal stimulus package from government. The Senate will vote on a USD 500bn package on Wednesday, though this is likely to be blocked by Democrats as insufficient.

A rapid rise in the number of new coronavirus cases in Europe has prompted renewed lockdowns in the continent’s largest economies. The degree of the restrictions on movement differ from country to country – and indeed from region to region as governments for the most part attempt localised measures to curb the virus’ spread, rather than the blanket restrictions seen earlier in the year – but the hospitality sector in particular is being sharply affected. This will place further strain on governments’ finances, and tough political questions over the scale and scope of any further support for those finding themselves unable to work.

The UK is one of those economies introducing new restrictions in many parts of the country, including London, and this will weigh on the outlook for the country. A deteriorating fiscal position – public debt was 101.9% of GDP in September, the first time it had exceeded output since 1963 – was one of the three factors cited by ratings agency Moody’s as it downgraded the country’s credit status on Friday night. A weaker growth outlook, and a ‘weakening in the UK’s governance and institutions’ were the other two. The long-term issuer and senior unsecured rating was moved down from Aa2 to Aa3, but the outlook was changed from negative to stable.

China real GDP, % y/y

Source: Bloomberg, Emirates NBD Research

Fixed Income

US treasuries closed higher across the curve last week as lawmakers in the US failed again to get close to a new stimulus package only a few weeks ahead of the presidential election. Divisions between the White House and Senate Republicans over the scale of any stimulus are perhaps as tough a hurdle to clear as getting bipartisan agreement with House Democrats. We still see a low chance of a deal getting reached before the election and believe that even if Democrats sweep control of government in November, a new deal may take time to agree. Yields on 2yr USTs fell around 1bps to 01.431% over the past week while they slipped nearly 3bps on the 10yr to close at 0.7456%.

Yields were more mixed across European developed markets at the end of last week as attention is focused on Brexit talks—or rather the lack of them. Moody’s cut its sovereign credit rating on the UK government to ‘Aa3’ in response to poor economic growth along with institutional credibility issues. However, the response in gilt markets was largely muted as investors prepare to give UK assets wide room to move ahead of upcoming Brexit deadlines.

S&P cut its rating on Oman to ‘B+’ with a stable outlook. Both Moody’s and Fitch had previously cut Oman’s rating but S&P’s rating is the lowest. Oman has announced recently that it would introduce VAT from April 2021 but the impact is likely to be minimal on the country’s finances in the near term.


The USD strengthened last week while other major currencies declined following strong risk-off sentiment hitting markets. The DXY index advanced by 0.67% and settled at 93.682, comfortably above the 50-day moving average of 93.311. USDJPY was the least affected, recovering from mid-week lows of 105.04 and closed at 105.40, marking a decline of -0.21%.

The EUR slipped as prospects for an economic recovery faded after a number of countries in the region imposed fresh lockdown restrictions, prompting a rush for the safe-haven USD. The currency fell by -0.91% and settled at 1.1718. It was a choppy week for the GBP which whipsawed after reacting to contradictory reports from both the UK and the EU over Brexit negotiations. Sterling ended the week down by -0.93% and closed at 1.2915. The AUD experienced a dramatic decline after RBA Governor Philip Lowe hinted at an upcoming rate cut, falling by -2.20% to settle at 0.7081. This marks a break below the 100-day moving average of 0.7097 and could signal further downside risk. The NZD was also placed under pressure as the currency slipped by -0.96% to close at 0.6602. 


Despite securing some sizeable gains on Friday, European equity markets were the significant losers last week. A rapid rise in new Covid-19 infections, and an escalating government response to this meaning renewed restrictions on activity in many parts of the continent, weighed on sentiment. France, Germany and the UK have all announced new lockdowns as cases have risen, and their respective benchmark equity indices lost -0.2%, -1.1% and -1.6% over the week, even despite gains of 2.0%, 1.6% and 1.5% respectively on Friday. Given that these end-of-the-week gains were largely driven by currency weakness, the outlook for European equity markets remains uncertain in this environment of rapid transmission.

Elsewhere, US equities eked out modest w/w gains, with the Dow Jones (0.1%), the S&P 500 (0.2%) and the NASDAQ (0.8%) all ending the week higher. In Asia, the Shanghai Composite climbed 2.0% w/w.


Oil markets were broadly flat last week with both WTI and Brent futures recording less than a 1% gain. The OPEC+ joint market monitoring committee meets at the start of the week to assess whether the producers’ bloc can indeed go ahead with tapering its production cuts from the start of 2021. There was also some high level oil market diplomacy between Saudi Arabia’s crown prince, Mohammed bin Salman, and Russian president, Vladimir Putin, over the weekend with both leaders stressing more cooperation on oil market stability.

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