December 8, 2011
Economic Snapshot
Don’t expect China’s year of the water dragon to start with a huge splash
JOHN CLINKARD
consulting economist, CanaData
With the Year of the Dragon (2012) just over a month away, there is growing concern about how hot the fire is under China’s economy.
This concern is intensified by a number of recent developments. First, according to the International Monetary Fund’s most recent World Economic Outlook, the combination of a steady tightening of monetary and fiscal policy and a slowing of external demand is projected to cause growth in China over the near term to occur at a more moderate pace in the range of 9% and 9.5%, following seven years (2000-07) in which it grew by an average of 10.5%.
A second factor pointing to a more muted pattern of growth over the near term is the prospect that economic growth in Europe, China’s second largest export market after the United States, will stall over the next two quarters thereby contributing to a significant slowdown of external demand for China’s output.
Finally, this outlook for a more moderate pattern of growth appears to be reinforced by the most recent OECD composite leading indicator for China which slipped from 99.9 in August to 99.8 in September, its lowest level since May of 2009.
Although a number of economic indicators are flashing “amber” with regard to China’s near term prospects, several recent reports suggest that the growth during the Year of the Dragon may end up being stronger than many currently expect.
According to the General Administration of Customs, China’s trade surplus increased from $14.5 billion in September to $17.03 billion in October due in part to a 15.9% y/y increase in exports.
At the same time, while the Baltic Dry Index of world shipping rates has pulled back from the high it reached in mid October, its uptrend since early August suggests that China’s appetite for raw materials is trending higher, albeit at a much more measured pace than it did during late 2007 and early 2008.
Another indicator of stronger growth ahead for China are signs that its largest export market, the United States, is starting to regain some momentum.
Specifically, stronger October US retail sales and a larger than expected increase in industrial production suggest that, following an extended hiatus, consumer spending and manufacturing are regaining some strength.
Finally, although the HSBC Flash China Manufacturing Purchasing Managers’ Index unexpectedly fell to 46.7 in November which points to a possible contraction in near term growth of industrial production, the new export order series accelerated in the month. This suggests that stronger external demand will give a boost to growth in China mid-way through the first half of 2012.
While it goes almost without saying that there are still very dark clouds over the outlook for the global economy in the form of uncertainty about European policy makers’ ability to resolve their sovereign debt crisis, there are definite signs that the pulse of economic activity in China as well as in North America is starting to beat a little faster.
John Clinkard has over 30 years’ experience as an economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Data Source: Bloomberg LLP, China Federation of Logistics and Purchasing/Chart: Reed Construction Data, CanaData.
