China – beyond the April data. The so-called April “disappointment” looks very different when viewed in a global context. While the April data did miss market expectations, the disappointment was off very high expectations set by the market itself. Looking beyond the underperformance of those expectations, the data was not at all bad by global standards. Indeed, there is nothing at this stage that challenges the recent suggestion by the IMF that China will likely be the biggest single contributor to global economic growth for 2023, and China is still on track to meet the Government’s “around 5%” GDP growth target for this year. For the record, the IMF’s forecast (published in May) was for 5.2% for this year. The Bloomberg median estimate (as at late May) was 5.5%.
Industrial output and manufacturing PMI weakness is a global phenomenon. Let’s start with the manufacturing PMI and industrial output. The official manufacturing PMI for May fell to 48.8 from 49.2 in April, and it was contradicted by the Caixin General Manufacturing PMI which rose from 49.5 in April to 50.9 in May. So, it is not even clear that manufacturing was in contraction in May. Yet, even if we took the weaker reading of China’s manufacturing, declines in manufacturing data is a global phenomenon, and the softness in China’s manufacturing PMI appears to be a reflection of that weakness in global demand. The Euro Zone PMI for May was a dismal 44.8. The S&P Global US Manufacturing PMI for May was 48.4.
China’s industrial output was actually up 5.6% y/y for April, up from 3.9% in March. The problem was one of expectations – the market was expecting 10.9%, according to Reuters. For comparison, US industrial production was barely growing at a miniscule 0.2% y/y in April. Japan’s industrial production contracted 0.3% y/y in April. The latest Euro Zone industrial production figure – for March – showed contraction of 1.4%.
China retail sales – what’s not to like about it? Retail sales is another area where China’s growth rate was a “to die for” figure for most economies, but only a disappointment for the market, which was quibbling over its expectation for a slightly higher figure. The market was expecting 21% y/y but the figure recorded for April was still a pretty stunning 18.4%. US retail sales barely grew in April, at 0.5% y/y. Euro Area sales contracted by -3.8% in its latest data point for March. That may indeed go some way to explaining softness in the manufacturing data from China. Actually, China’s comparative retail sales figure was even better in real terms, given its low inflation. Real retail sales growth for China in April was +18.3% y/y. Retail sales in the US in inflation-adjusted terms went deeply negative in April, at -3.2% y/y.
The pessimism about fixed asset investment growth was again about disappointment of heightened expectations. Fixed asset investment grew 4.7% y/y in April. Again, the failure was only against market expectations – which was for 5.7% y/y (on the Bloomberg estimate). But again, look at that in a global context: Private domestic investment in the US contracted in 1Q23, by -2.0%.
Fear of low inflation is misplaced. It is reasonable to fear deflation as it is to fear inflation. But fear of low inflation – not deflation, mind you – is misplaced at this early stage of China’s reopening. Low inflation is not a bad thing when the Developed Markets are struggling with high inflation. Indeed, rapid rise in inflation at the early stages of China’s reopening could be a problem in the sustainability of that economic recovery. This low inflation rate provides the People’s Bank of China and other policy makers room to stimulate the economy where very little room exists for Developed Market policy makers. By the way, it also spares Developed Market economies from China exporting inflation to them.
The greater role of the Chinese consumer in driving growth was exactly what commentators were demanding for years. Oddly, some commentators appear uncomfortable that consumers have been the biggest driver for growth in the Chinese economy. But for decades, commentators had been bemoaning the reverse – that the Chinese economy was overly dependent on net exports and fixed asset investment for growth and that the Chinese consumer’s contribution to GDP growth was too low.
A reminder on what the IMF said last month. In its May 2023 Asia and Pacific Regional Economic Outlook, the IMF painted a “sombre” picture of a global economy struggling with the dampening effects of monetary tightening, “persistent inflationary pressures”, and “financial sector problems” in the US and Europe. Against that, it said Asia Pacific “remains a dynamic region”, with “China’s reopening providing fresh impetus”. In approximate numbers, the IMF’s estimates suggest that China should contribute around 30% of the world’s GDP growth for this year. India would likely contribute another 20%, and the rest of Asia another 20%.