With all the economic indicators in India showing decline, there has been growing concern over the slow growth which has been recorded at the lowest level in the recent past. But, it looks like a global phenomenon, as this slackness growth has inflicted almost all countries in the world, including China.
China's growth rate slowed for a sixth successive quarter to its slackest pace in more than three years, highlighting the need for more policy vigilance from Beijing even as signs emerge that action taken so far is beginning to stabilise the economy.
Year-on-year growth of 7.6 percent in the second quarter was whisker above the Government's official 7.5 percent full year target and dragged the first half average down to 7.8 percent- below the 8 percent level that in previous downturns has triggered a robust response from policymakers. The GDP number, released in a flurry of Chinese data was roughly in line with investor expectations.
The trajectory of the economy is crucial for money managers facing a slowdown not only in China, the worlds second largest economy, but anaemic growth across the BRIC grouping of major emerging economies Brazil, Russia, India and china which combine as the biggest marginal generators of global growth.
"I would say probably the worst is over and we are going to see some stabilisation and even improvement in growth in the next quarter," Sun Junwei, China economist at HSBC in Beijing said, citing improvement in quarter-on-quarter growth and broad stability in June data for fixed asset investment, industrial production and retail sales. "It pretty much depends on what will be the strength of further easing, but I think the chance is good that (policymakers) are willing to respond to this growth slowdown."
Beijing's response to the slowdown so far, sticking rigidity to a mantra of fine-tuning and a series of tweaks to monetary and fiscal policy over the last eight months, has left the economy on track for its slowest full year of growth since 1999, raising the risk for some investors that the Government is behind the policy curve.
Two cuts to benchmark interest rates in the space of a month and liberalisation moves that permit discounts to borrowing costs of up to 30 percent more, as signs to others that policy makers will do all they can to underwrite growth. Sheng Laiyun, spokesman at China's statistics bureau, said the data signalled that the economy was stabilising in Q2 and that growth in the first half was in line with expectations. The Q2 forecast in the benchmark Reuters poll was 7.6 percent.
Financial markets took the data in their stride, with Hong Kong shares gaining slightly on relief that it wasn't any worse, a sentiment echoed among oil traders who nudges Brent crude oil down a touch, while the China- sensitive Australian dollar edged up from session lows.
Chinese Economy in Pains
"Overall, this is a soft landing, but we can see that the Chinese economy is undergoing serious pain," said Xianfang Ren, an economist at IHS Global Insight in Beijing. "I have 80 percent confidence that the economy will pick up in the third quarter as we have been in a slowdown for six consecutive quarters now. However, if the economy does not show an upturn in the next few months, factories will probably have to lay off workers and that will hit employment."
Inflation and trade data showing fast-easing consumer prices, outright deflation in producer prices and import growth at less than half the rate expected in June sent a bearish shiver through financial markets.
Employment is one of the few indicators not yet signalling a return to the low points of 2008/09, with economists tending to believe firms are holding back on job cuts in anticipation of a rebound in growth that could leave them woefully short of skilled staff given China's broad labour market tightness. But for firms to retain that faith in a near-term rebound will require more policy action to support growth, analysts say.
Cuts in CRR
"We do expect Beijing to be more aggressive in accelerating start-up of new projects and constructing existing projects, and believe that Beijing (will) be much more serious on social housing," Ting Lu, China economist at Bank of America/ Merill Lynch in Hong Kong, said. Lu also expects further cuts to banks' required reserve ratios already lowered by 150 basis points since November 2011 to release an estimated 1.2 trillion yuan for lending and two more 25 basis point cuts to benchmark interest rates before the end of the year.
Fixed asset investment has been the key driver of economic expansion in China for a decade and it's a major risk factor for investors watching its rate of growth ease back from 25 percent plus to around 20 percent on average so far this year especially as the government's stated aim is to reduce its contribution to growth as it rebalances the economy.
Economists remain divided about when China's Economy will reach the bottom of its current cycle, with many preparing to take the scalpel to full-year forecast which, according to the last Reuters consensus poll in April, call 2012 frowth at 8.4 percent. The Asian Development Bank cut it Full-year China growth expectations for 2012 to 8.2 percent in new forecasts published recently, down from the 8.5 percent it had estimated in April.
This article was originally published in the Stitch Times, August, 2012.