Weekly Market Review for Week Ending 13th of April 2012
Weaker-than-expected Chinese growth figures would normally prompt much hand-wringing on the part of economists – after all, it is China that is supposed to be keeping the world economy afloat while developed markets recover. Yet the recent poorer growth figures were greeted with a shrug.
Forecasts had been for quarter-on-quarter growth of between 8.3% and 8.4% but instead the first-quarter figures came in at 8.1%. This represented a significant slowdown from the previous quarter, when growth was at 8.9%.
So why has no-one proved particularly troubled? Initially, it seems that not many people believe the estimated figures. Also, given the weak climate for exports – the eurozone is a major trading partner for China – many were surprised that the figures were not far weaker. Ideas on what constitutes a ‘hard landing’ vary, but are generally much lower than 8.1%.
The underlying data was also encouraging – for example, the data showed the main growth driver in the quarter was consumption, with retail sales up 11%. This is exactly the type of growth targeted by the authorities to shift the economy from its dependence on exports and infrastructure development.
It would have been a significant problem had consumer growth proved stubbornly weak, but this is a good indication it will develop in line with expectations. There were other positive signs too, with the OECD leading economic indicator being revised higher and now pointing to a strong improvement in growth. Loan growth is also continuing to improve.
Furthermore, authorities still have some firepower remaining to loosen monetary policy. Inflation appears to be peaking and monetary policy is likely to shift from easing to stimulus shortly, particularly with an election imminent. The overall result is that many economists are now predicting the growth trend will start to improve from, at the latest, the third quarter of 2012.
It seems Chinese policymakers are optimistic too – for example, they have recently shifted the yen trading rules. Reuters has even suggested this is the “the strongest signal Beijing could give that growth downside has diminished and potential pitfalls are manageable”.
The prevailing view is that this marks the end of a slowdown in China rather than the start of something more sinister. This is all set against the backdrop of an improving global economy, which should give China a tailwind going into the next quarter. If global growth collapses, or stimulus measures prove ineffective, there may be trouble ahead. Until then, Chinese growth should pose few worries for investors.