Economy Shows Signs of Strain
China’s inflation slowed to 2.1 percent year on year in May, down from the 2.4 percent registered in April and the lowest rate in three months (see Chart 1). The slowdown was mainly attributed to falling vegetable prices, which dropped 13.8 percent in May from April. The latest inflation data showed China’s economic growth has continued to slow down, with second quarter growth now expected to come in even lower than the 7.7-percent growth rate registered in the first quarter. Meanwhile, the Producer Price Index (PPI) fell 2.9 percent, marking the steepest drop since September last year and pointing to continued weak market demand (see Chart 2).
Cutting growth forecasts
Economists have been cutting their growth forecasts for the year, with the International Monetary Fund (IMF), one of the latest financial institutions to downgrade its outlook for China. The IMF now predicts China’s GDP growth to come in at 7.75 percent this year and in 2014, cutting its previous estimates of 8 percent and 8.2 percent, respectively. Meanwhile, the OECD slashed its 2013 growth forecast to 7.8 percent from a previous forecast of 8.5 percent. Overall, economic experts predict weaker global and domestic demand as China’s newly-appointed leaders resolve to forgo short-term stimulus for slower, more-sustainable growth. While the latest figures boost the case for easing monetary policy or approving more spending, room to maneuver remains limited by rising home prices, financial risks and overcapacity.
Manufacturing up
China’s official Purchasing Managers’ Index (PMI) for the manufacturing sector edged up to 50.8 in May, from 50.6 in April (see Chart 3). A PMI reading above 50 indicates an expansion in manufacturing activity from the previous month, whereas a reading below 50 indicates contraction. The modest rise of the manufacturing PMI raises optimism that China’s economy may be stabilizing. However, saddled with excess capacity, China’s factories continue to struggle against weak demand. Thus far China’s policymakers have been reluctant to roll out fresh stimulus steps to support the economy, as they fear increased state spending could lead to a further acceleration of credit expansion and fuel a property bubble.
Trade growth slumps
Retail sales growth accelerated slightly to 12.9 percent year on year in May, faster than the 12.8-percent rise in April (see Chart 4). While China’s trade surplus widened in May, the overall trade picture was tepid. Imports slipped, shrinking 0.3 percent to reach $162.3 billion, signaling a possible sign of weakness in the domestic economy (see Chart 5). Following a months-long surge that raised questions about the accuracy of the data, export growth unexpectedly slumped to a 10-month low in May, edging up a meager 1 percent to reach $182.8 billion (see Chart 6). China’s exporters are also struggling against the accumulated impact of a stronger yuan and higher wages, both of which dent competitiveness.
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