Friday, March 14, 2014

China data underwhelming

China activity data for the start of 2014 came in well below market expectations.  While we expected the start of the year would be the weakest point in 2014, this data suggests downside risk to our forecast of 7.4% GDP growth for the year to March 2014.

Growth in industrial production came in at 8.6% for the January-February period, down from 9.7% in the year to December.  Fixed asset investment growth fell to 17.9%, which is about the same pace as late last year but below the full 2013 year growth rate of 19.6%.  Growth in retail sales dropped from 13.6% in December to 11.8% in Jan-Feb.

This data came hot on the heels of weaker than expected February export data last week.  That said the February result came after stronger than expected January data.  Taken together the two months came in slightly below year ago levels which seems a more realistic picture for exports at this stage of the year.

Our expectation for China GDP growth this year was for a weak start with a stronger finish as exports picked up on the back of stronger global growth as the year unfolds.  We continue to expect that pattern of activity through the year, although the weak start could be a tad softer than our current forecast of 7.4% for the year to March 2014.

At this point I’m sticking to my full-year 2014 forecast of 7.5% GDP growth, although acknowledge the risk have shifted to the downside.  However, if data continues to come in soft we expect the leadership will change its preference for structural reform over cyclical support for the economy.

So long as the labour market holds up we think the authorities will be comfortable with slightly lower growth.  However with the recent confirmation of the growth target of 7.5% for 2014, the key word in that sentence is “slightly”.  The good news is that with inflation well contained, there is ample room on both monetary and fiscal policy to support growth with fiscal policy (infrastructure) the likely first cab off the rank should they decide to do something.