Chinese monetary trends signalled current economic strength and now suggest a modest loss of momentum during the second half of 2017.
First-quarter and March economic data released yesterday were mostly stronger than expected. Annual growth of nominal GDP rose to 11.8% last quarter, the fastest since 2012 and up from a low of 6.4% at end-2015. The recent surge has been driven by the GDP deflator but real GDP growth of 6.9% was above the consensus forecast and a 6.5% full-year official target – see first chart. Annual industrial output expansion, meanwhile, climbed to 7.6% in March, the fastest since 2014, despite a slowdown in auto manufacturing following a partial reversal of the 2015 sales tax cut on smaller vehicles.
These robust results are consistent with monetary strength last summer. The preferred narrow and broad monetary aggregates here are “true” M1 and M2 excluding financial corporations' deposits respectively. True M1 includes household demand / temporary deposits, which are relevant for assessing consumer spending prospects. (The official M1 measure includes only corporate deposits.) Financial deposits within M2, meanwhile, have been highly volatile in recent years but appear uncorrelated with economic developments.
Annual growth of the two preferred measures rose significantly between mid-2015 and summer 2016, signalling that nominal GDP expansion would pick up strongly into the first half of 2017 – second chart. True M1 growth peaked in August 2016, at 22.1%, and growth of M2 ex. financial deposits in November, at 13.4%. The latest figures, for March, are 16.3% and 11.4% respectively. The lag between money growth and nominal GDP growth turning points has been variable in recent years but a reasonable expectation is that annual nominal GDP expansion is at or close to a peak and will moderate during the second half of 2017.
The two money growth measures have retraced less than one-third of their rise over 2015-16, suggesting a minor decline in nominal GDP expansion, which should remain well above the low reached in late 2015.
Economic activity prospects are related to real (i.e. inflation-adjusted) rather than nominal monetary trends. The third chart shows six-month rates of change of industrial output and narrow / broad money deflated by consumer prices (seasonally adjusted). The real money growth measures have fallen significantly since summer / autumn 2016 but are close to their averages since 2010, consistent with a moderation in economic expansion rather than a return to sub-par performance. The typical nine-month lead suggests that coincident economic news will remain robust into mid-2017.