Optimism In The Air

Economic indicators published this summer signal a slight rebound in growth. Assuming world trade conditions improve and there is clearer support from fiscal policy, real GDP growth should pick up in Q3 2013 and reach the government’s full-year target of 7.5%. The authorities have changed their tune, which has helped correct the excessive pessimism that followed the interbank liquidity crisis last June. A few stimulus measures have been introduced and the government seems to be standing firmly behind structural reforms. Yet the very high debt levels of the economy and its needed downward correction represent a major source of vulnerability.

This summer’s good news
Economic indicators and confidence surveys released during the summer signal the beginning of a rebound in Chinese growth. Industrial output rose 10.4% year-on-year (y/y) in August, after holding below the symbolic threshold of 10% since the beginning of the year. This improvement is partly due to a smaller destocking movement and a slight upturn in domestic and external demand.

Export growth has accelerated since July, driven by a rebound in sales in all its main markets (chart 1). If this upturn continues, buoyed by firmer world demand and a slower appreciation of the yuan, it could be a major support factor for economic activity in the very short term – even though export growth remains at historically low levels. Imports also began to pick up again over the summer. As a result, the contribution of net foreign trade is likely to remain near zero (it was estimated at +0.1 pp in H1 2013). Recent foreign trade dynamics have been mainly due to volume effects while the terms of trade have improved slightly.

Investment also showed signs of recovering. So far, the acceleration has been minimal (+20.3% y/y in January-August, vs. 20.1% in January-July), but the good news is that it stems from manufacturing investment. Brighter prospects for world demand finally seem to be boosting confidence of industrial enterprises. Public investment in infrastructure is still going strong. Meanwhile, in the real estate sector, developers are still cautious and investment growth continues to slow. However, construction starts rebounded over the summer and stocks of housing declined in H1, which could soon fuel an upturn in real estate investment.

Retail sales have regained vigour after slowing in H1 2013. They have increased by 13.3% y/y per month on average since June, compared to 12.8% over the period March-May. Yet this acceleration is mainly due to higher inflation, and the rebound in sales volumes was much smaller (+10.7% per month since June vs. 10.6% in March-May).

BY Christine PELTIER

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