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.