Recent economic reports from China are, at the least, mixed. The responses to Friday’s GDP report are illustrative.
From IHS-Global Insight (Xianfeng Ren):
China has reported the worst quarterly GDP growth, 7.6%, in almost three years. This is a less vicious downslide compared with the Global Financial Crisis if measured by peak-to-trough deceleration, but nearly as bad as in the Asian Financial Crisis. The length of consecutive quarterly GDP growth deceleration is even longer than in the slide following the Asian Financial Crisis—six straight quarters of deceleration, vs. five in the Asian Financial Crisis. Domestic macro control and weakening external demand are the causes of the slowdown, but it is policy miscalculation and larger-than-anticipated shock from the Euro Zone which have caused the stalling in Q2. … What is more dismal than the dismal growth is China’s inability to absorb slower growth. A 7.8% growth in the first half already feels quite hard in terms of impact, inflicting huge pain: a downward spiral of producer prices, surging manufacturers’ inventories, plunging profits, bankruptcies and pay cuts.
China’s Q2 real GDP growth slowed to 7.6% yoy (1.8% qoq, sa) after 8.1% yoy in Q1 – the slowest rate since Q1 09 – putting H1 12 growth at 7.8%.
Q2 growth was in line with market expectations. . . . The most likely scenario is marginal easing of property market curbs, further easing in monetary policy to support liquidity and targeted stimulus measures to bring forward some infrastructure projects, with a view to preserving jobs and supporting consumption. This should help to contain systemic risk arising from bankruptcies and defaults. The rebound in H2 is not yet assured, as suggested by leading indicators such as PMI. But we expect public investment, as shown by the recent pick-up in fixed asset investment, to limit the downside.
Source: ChinaScopeFinancial, July 13, 2012.
These assessments are based upon a fairly straightforward reading of the official data. Of course, observers have long cast a skeptical eye on these data. From Thomas Orlick and Aaron Back:
BEIJING — Official data due this week are expected to show growth in China slowing to its lowest rate since the global financial crisis. But some economists say they are turning up evidence that the true picture could be even worse.
Economists have responded to long-standing doubts about the reliability of official data by constructing their own indexes of China’s growth. Typically these are based on measures such as electricity production, rail freight and real-estate construction that should track growth closely but are regarded as less prone to political interference.
London-based research firm Capital Economics created its own index during the last major downturn during the 2008-09 crisis. “We created a proxy of Chinese economic activity in order to answer doubts about the data, somewhat to our surprise it generally runs in proximity to the official numbers,” said Mark Williams, an economist at the firm. “But particularly at the beginning of this year they began to diverge. So doubts about the quality of the data are justified.”
Capital Economics’ proxy indicator suggests that China’s economy grew by around 7.6% in the first quarter of this year, half a percentage point lower than the official GDP figure.
Similar results reached by other analysts have led some to suspect that the data are “smoothed” and become less reliable during periods of rapid slowdown or strong growth — times when the margin for error in calculating the true rate of growth also may be higher.
Friday’s numbers will be underpinned by a new approach to collecting data on industrial output, a key measure of China’s growth accounting for about half of GDP.
Under the new approach, in place since February, China’s biggest 700,000 enterprises report data directly to the NBS over the Internet. That replaces a system where many reported to local statistics offices, and information was then transmitted from town, to city, to province and to national levels.
The latest approach is intended to overcome one of the main flaws in China’s data system — exaggeration of the growth rate by ambitious local officials. A notice on the National Bureau of Statistics website in February announcing the change called on businesses to “submit data independently, resisting any attempts at interference.”
China takes on heightened importance because China was one of the bright spots in the world economy, contributing one of the largest increments to world GDP . As illustrated in the IMF’s World Economic Outlook update, released yesterday, forecasts finalized even before Friday’s GDP release marked down in a noticeable fashion. Forecasted 2012 and 2013 y/y growth rates have been reduced by 0.2 and 0.3 percentage points, respectively.
What do the leading indicators suggest? The OECD’s indicate a downturn (where numbers below 100 indicate that growth will be below trend).
Solid blue line: Composite Leading Indicator; dashed red line: index of industrial production. Figure from OECD Composite Leading Indicators (CLIs): Historical Data and Methodological Information – Updated: July 2012: Tables and Graphs.
The OECD CLI for China is designed “to provide early signals of turning points between expansions and slowdowns of economic activity” and uses the following components: Production of chemical fertilizer (tonnes), monetary aggregate m2 (Renminbi), Production of manufactured crude steel (tonnes), 5000 Industrial Enterprises Diffusion Index, Overseas order level (%), buildings (m2), Production of motor vehicles (number), and the Shanghai Stock Exchange Turnover (Renminbi).
Why the dispersion in outlooks? I think it has to do with the difficulty in (1) determining how the leadership will respond to slowing growth, and with which instruments, and (2) how much economic activity will respond to manipulation of those economic instruments, and at what horizon. Item (1) in particular is more amenable to political analysis than economic analysis (for sure, I never learned anything about judging these matters in grad school). However, Eswar Prasad (former IMF China desk head, currently at Brookings) belives that with the transition in the offing, policymakers will do what it takes to hit the targets: “Chinese policy makers are likely to open the taps on both monetary and fiscal policy measures to revive growth momentum in the second half of the year.” … “Given the imminent leadership transition, hitting this year’s growth target is now the key policy priority.”
Returning to the global context, the IMF’s implicit prescriptions make a lot of sense to me, given the euro area and China growth prospects are being marked down. In particular, it is ever more incumbent that the US avoid the fiscal cliff, by extending the stimulative measures (aside from the tax cut for incomes over $250K which do not seem to have a big “bang for the buck”) and avoiding the sequester.
. . .These forecasts, however, are predicated on two important assumptions: that there will be sufficient policy action to allow financial conditions in the euro area periphery to ease gradually and that recent policy easing in emerging market economies will gain traction. Clearly, downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action. In Europe, the measures announced at the European Union (EU) leaders’ summit in June are steps in the right direction. The very recent, renewed deterioration of sovereign debt markets underscores that timely implementation of these measures, together with further progress on banking and fiscal union, must be a priority. In the United States, avoiding the fiscal cliff, promptly raising the debt ceiling, and developing a medium-term fiscal plan are of the essence. In emerging market economies, policymakers should be ready to cope with trade declines and the high volatility of capital flows.