The Chinese economy could disappoint both “hard landers” and reaccelerationists during the second half, with leading indicators and monetary trends suggesting stable, slow growth.
Six-month industrial output expansion was an estimated* 4.0% (not annualised) in June, little changed from April and May and below a 6.9% average since 2005. This performance is consistent with recent moderately soft PMI results – see first chart.
A forecasting indicator based on the OECD’s Chinese leading index provides a slightly longer lead than the PMI – second chart. This, too, has been moving sideways recently. (Caveat: the index, while useful, is sometimes subject to large revisions.)
Monetary indicators paint a mixed picture. A slowdown in real money and loan growth predicted the loss of economic momentum from early 2011. Six-month expansion of real M2 and loans bottomed in mid 2011, picked up into early 2012 but fell back into mid-year – third chart. This decline argues against a near-term industrial reacceleration although real M2 / loan growth levels are respectable.
“Hard landers”, however, can cite continued real M1 contraction – narrow money has diverged to an unusual extent from M2 and loans since mid 2011. M1 lagged the other measures at the 2008 trough and 2009 peak, suggesting that it will revive to close the gap over coming months. Caution is warranted until such a pick-up is confirmed.
*A monthly unadjusted volume index was estimated from published data on growth rates and output value / prices. This was then adjusted for Chinese New Year timing effects and other seasonal factors.
