Is China’s 2022 growth target still attainable?
On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Investment Strategy Analyst BeiChen Lin discussed the impact of rising mortgage rates on the global housing market. They also reviewed recent inflation data from Canada and the eurozone, and assessed economic growth prospects in China this year.
U.S. mortgage rates top 5%, but inventory remains tight
Lin began the conversation by noting that mortgage rates have risen noticeably across the globe as central banks move to tighten monetary policy. This is particularly true in the U.S., he remarked, explaining that the average 30-year fixed mortgage rate now stands above 5% - the highest level in 12 years.
Cousley said this could have significant impacts on the housing market, as housing is typically one of the most rate-sensitive sectors of the economy. This is already happening in places like New Zealand, he noted, where the Reserve Bank of New Zealand recently lifted borrowing costs for the fourth consecutive time, bringing its benchmark lending rate to 1.50%.
"In New Zealand, we're seeing signs that the recent strength in the housing market is really starting to slow, if not decline, on the back of these rate rises," Cousley said. He added that similar signals are also emerging in neighbouring Australia, where the central bank is expected to begin raising rates over the next few months.
Cousley said that due to its very tight inventory, the U.S. housing market is a bit of an outlier relative to other developed countries at the moment. "I anticipate that a softening in demand probably won't occur in U.S. housing this year, given the limited supply, but it could happen next year," he stated.
Cousley added that the housing market remains particularly fragile in China, due to ongoing stress in the property sector. With home prices and sales volumes remaining rather soft, the Chinese government has enacted some recent initiatives to try to improve demand for mortgage applications and home purchases, he said. While Cousley expects that this may give the sector a boost in the coming months, the impacts haven't shown up in the data yet, he noted.
Canadian consumer prices surge. Is another 0.5% rate hike in store?
Turning to the latest inflation numbers from around the globe, Cousley said that pricing pressures remain elevated in Europe, with core inflation up 2.9% in March on a year-over-year basis, according to the latest numbers from Eurostat. The increase in so-called core inflation - which excludes the volatile food and energy sectors - was actually slightly below consensus expectations for a 3.0% rise, he remarked, but still represents a sizable jump.
Cousley noted that the European Central Bank (ECB) hasn't lifted borrowing costs yet, and said he expects the ECB will continue to lag behind most other central banks in this regard. However, in his opinion, the latest inflation data probably means that the time for the first ECB rate hike is drawing closer, he said.
Meanwhile, in Canada, headline inflation accelerated sharply in March, Cousley observed, with the country's consumer price index (CPI) surging 6.7% on a year-over-year basis. The increase was well above consensus expectations for a 6.1% rise, and marked the largest jump in prices since January 1991, he noted.
"The Bank of Canada (BoC) recently announced a rate hike of 50 basis points, and these latest numbers could strengthen its case for another 50-basis-point increase in June," Cousley stated, adding that the BoC's key lending rate now stands at 1.0%.
Unemployment rate rises in China amid COVID-19 outbreak
Turning to China, Lin asked Cousley if the Chinese government's growth target of 5.5% for 2022 is still achievable. Cousley said that, in his opinion, it's probably not, given the impact of recent COVID-19 restrictions. "Right now, areas in China that account for roughly 40% of the country's GDP (gross domestic product) are under some form of lockdown - and that's probably going to make the 5.5% target a really difficult number to meet," he explained.
To help offset the impacts of the lockdowns, Cousley said he believes more stimulus is probably on the way, likely in the form of fiscal spending. In addition, the People's Bank of China (PBOC) may enact a few more easing measures, he remarked. "The PBOC has signalled its intent to increase monetary and credit-policy support, and recently announced it will also relax some of its restrictions on local government financing vehicles," Cousley noted, characterising the news as an encouraging sign at the margin.
Cousley said that one of the most significant data points to pay attention to as China combats slowing growth is the country's unemployment rate, which exhibited further weakness in March, rising to 5.8%. "Given the political importance of this year in China, with the 20th National Party Congress likely occurring in October, the unemployment rate is going to be a very important watchpoint," he remarked.
Ultimately, Cousley said that the longer China's COVID-19 outbreak persists, the harder it will be for the country to reach its growth target for the year. Compounding the situation is the fact that the vaccination rate among the country's elderly population is significantly lower than in most of the developed world, making China more vulnerable to the severity of the virus, he noted.
The best way for the nation to overcome the current outbreak and its associated lockdowns may be the widespread use of Pfizer's pill to treat COVID-19, Cousley said. "The Chinese government has approved the use of the Paxlovid pill, and mass production of this may lead authorities to relax restrictions and become a little more comfortable about living with the virus - but we're still a few months away from potentially reaching this stage," he concluded.