International | Aug 20 2008
By Chris Shaw
While data have for some time suggested the Chinese economy is slowing, the latest round of numbers to come out suggests the pace of any slowdown is modest. CommSec takes the view that recent figures should allay concerns about the health of the world’s primary economic growth engine at present.
As the group’s equities economist Savanth Sebastian notes, industrial output for the year to July, while down from June’s 15.9% year-on-year gain, was still up a healthy 14.7% from year ago, while retail sales were up 23.3% from the same time last year. This is the fastest rate of growth for the past 10 years.
This may be partly explained by sales leading into the Olympics, Sebastian notes. He also says higher food prices were also a contributor, while underlying strength is still evident given strong year-on-year growth in categories such as automobile and cosmetic sales.
On Sebastian’s estimates, the data continue to suggest Chinese economic growth in 2008 of around 10%, a forecast similar to that of Westpac senior international economist Huw McKay. While this is down from 2007’s 11.9% result, McKay points out official rhetoric suggests there will be an increased focus on growth at the expense of inflationary concerns going forward.
He says policymakers have a number of options at their disposal to sustain growth at around double digit levels, including allowing the banks to expand credit, cutting taxes for those on lower incomes and on investment income, re-introducing export subsidies in certain sectors and slowing the pace of currency appreciation.
The other option available is a further increase in public works expenditure, with the transport and utilities sectors the most likely beneficiaries of such a move in McKay’s view. In other words, there is scope for something of a sectoral shift in spending, which he notes is similar to what occurred a few years ago when there were concerns a small number of sectors of the economy were overheating and policymakers responded by cutting funding to those areas.
Such a move is unlikely to cause too many problems with respect to inflation, according to Sebastian, as he notes while inflation has been elevated in recent months, it is only a few areas such as food prices that are driving up the readings. As well, the slowing in the global economy has come at a good time in his view, as it has eased some concerns about the pace and sustainability of China’s economic expansion.
As evidence of this, Sebastian points out inflation slowed in July to 6.3%, a 10-month low and an outcome below market expectations of a 6.5% increase. This is despite exports growing by 26.9% in the year to July, compared to 17.2% in the year to the end of June.
With a number of projects being put on hold while the Olympics are on, Chinese growth is more likely to accelerate in coming months, according to Sebastian. This is also good news for those worried the commodities boom is coming to a faster than expected end, he reasons, as a strong Chinese economy means strong demand for resources.
