World's Two Largest Economies Two Biggest Differences

4 Dec 11

Amongst all the bad news around the globe about contracting manufacturing sectors, it is at least pleasing to see some good news with a larger than expected pick-up in US manufacturing.

The US Institute for Supply Management's manufacturing index hit 52.7 per cent, (50 per cent being the point that seperates contraction and expansion) much more than the 51.0 per cent expected. "Economic activity in the manufacturing sector expanded in November for the 28th consecutive month," the ISM reported. The index increased 1.9 percentage points from 50.8 per cent in October, said Bradley Holcomb, chair of the ISM.

Reports also suggest that the US retail sector is also regaining some health. Despite the good news, US equity markets remain cautious as analysts are yet to be convinced that the stronger manufacturing and retail sectors will translate to a drop in unemployment which has remained stubbornly high since on the on-set of the GFC.

We now have a situation that the world's two largest economies, China and the US are moving in opposite directions. Despite postive news about growth in the US manufacturing sector, we see Chinese manufacturing moving in the opposite direction with it's equivalent measure of sector performance, in contraction for the first time since March 2009 at 48 per cent. We have previously reported on Australia's manufacturing sector's lacklustre performance of 47.8 per cent.

Recent data also points to a contraction in the non-manufacturing sectors in China. New orders in the non-manufacturing sector fell to 47.2 in November, down 5.3 points over the month, according to data from the federation based on a survey of about 1200 companies in 20 industries, Xinhua news agency reported.

Lower global demand for Chinese exports, particularly from the troubled Eurozone is having a slowdown impact throughout the Chinese economy, which stands to reason, with manufacturing being such a large part of the Chinese economy, when it slows, the flow-on effects, impact on the rest of the economy.

China's central bank on Wednesday announced the first cut in bank reserve requirements in almost three years to help boost lending and spur growth to counter alarming signs of a domestic slowdown and the crisis in vital export markets.

China, anxious about rising living costs, over the past two years until now, had taken a variety of measures to curb price rises, including increasing interest rates five times since October 2010.

If economic fundamentals work true to form, the Australian dollar should remain below par and even weaken. Signs of a stronger US economy will result in an increase in the value of the US dollar globally, and weakness in China will negatively impact on Australia's resource exports and mineral prices which has for sometime been keeping the value of the Australian dollar high.

Any depreciation in the value of the Australian dollar can only help the embattled Australian manufacturing and tourism sectors.