Tuesday, December 11, 2012

Modest China recovery underway

The release of China November activity and price data confirms an upward trend is emerging in activity while inflation remains benign.

Headline industrial production growth accelerated to 10.1% in November, up from 9.6% in October.  That result provides further evidence that the headwinds from the destocking cycle are abating and that production growth will now move back in line with overall growth in activity.
 
Retail sales growth also accelerated in nominal terms, although the growth rate in volumes was flat at 13.5% y/y.  Retail sales have held up well during the slowdown, a reflection that the labour market remained relatively stable.  Remember the recent slowdown in growth was in large part engineered by the authorities to remove some of the post-GFC stimulus excesses.  They would have been under more pressure to respond policy-wise had the labour market weakened.
 
The disappointment in the data was in a flat result for fixed asset investment and a decline in the growth rate of exports.  In terms of investment transport continues to play a significant role given much of the recent fiscal stimulus has been aimed at road and rail.  Residential investment is also stabilising in line with other housing market data.  Export data can be very volatile, but the drop down from 11.6% y/y growth in October to 2.9% in November was significant.  Global growth (especially the ongoing recession in Europe) will continue to be a headwind for export growth.
 
CPI inflation came in at 2.0% for the year to November, up from 1.7% in October.  Inflation has clearly bottomed out, but remains well below the official target of 4.0%.
 
This data, along with the November PMI data released last week makes me comfortable with the view that GDP growth bottomed out in the third quarter and that a modest reacceleration is underway.  Our annual average GDP growth forecast for calendar 2012 is 7.7%, rising to 8.0% in 2013.