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China Economic Update

Wayne Iversen

By Wayne Iversen


April 2, 2012

January-February indications: further slowing

Two of the three demand indicators suggest that the economy has continued to slow in 2012Q1. Real sales averaged 11 percent in January-February, down from 13 percent in Q4.

The trade data has also been negative. Both import and export growth were sharply lower in January and February, indicating weakness at home and abroad. Moreover, the trade balance fell into deficit. Net exports will almost certainly subtract from growth in 2012Q1.

The positive news came from real investment demand, which grew at 21 percent in January-February, up from 17 percent in 2011Q4. The increase here appears to have mostly come from investment in real estate.

The production indicators were mixed, but also suggested further weakness ahead. The growth of industrial value added slowed to 11 percent in January-February from 13 percent in 2011Q4. Industrial value added has not been below 12 percent since August 2009.

Inflation is decelerating, with both the Consumer Price Index (CPI) and the Producer Price Index (PPI) growing more slowly in January-February than in 2011Q4.  While Premier Wen recently targeted 4 percent CPI inflation, the Embassy thinks the number will be closer to 2 percent and will leave room for the People’s Bank of China to ease much more aggressively.

Slowing growth and falling inflation bring policy response

The Embassy continues to believe that growth will decelerate in this quarter and the next before rebounding in the second half of the year and that growth will to fall to 7.4 percent in 2011Q1 and 6.6 percent 2012Q2 on a quarter-over-quarter basis. They maintain the forecast that growth will slow to 8.2 percent in 2012, from 9.2 percent in 2011.

With growth falling below the 7.5 percent that Premier Wen targeted in his speech last week and inflation well below 4 percent, the embassy thinks that there will be a much more aggressive counter-cyclical monetary policy response than the People’s Bank has shown up to now.

Note: Source – Canadian Embassy