Decision Time

Economic growth has been very disappointing since the beginning of the year. Private investment has stalled, hampered by weak exports, some overcapacities in the industry and a wait-and-see attitude in the real estate sector. Overall, the policy mix has remained accommodative, but the room for manoeuvre has narrowed and the new government seems to be making a priority of reforms. In this context, the central bank chose to let interbank liquidity tighten in June. In the very short term, while the authorities are likely to implement targeted measures to support the economy, an improvement in the international environment is now the necessary condition for an upturn in growth.

Concern
In Q4 2012, real GDP growth recovered to 7.9% y/y, driven by public sector investment, improved credit conditions and a revival in regional trade in Asia. But it slowed down again in Q1 2013, to 7.7% y/y, or 5.8% q/q annualised, the lowest rate since the crisis at the end of 2008. Given activity indicators for April and May and the latest PMI data, growth is unlikely to have accelerated again in Q2. In particular, private investment has stalled (chart 1). The solid growth in infrastructure projects has only partly offset the weakness of manufacturing investment. The absence of a lasting recovery in demand from advanced economies remains a powerful drag on activity in the export sector. Yet, export sales did recover in Q1 (up 18% y/y compared to 9% in Q4 2012), but this was more due to over-invoicing by exporters searching liquidity rather than an upturn in demand. The introduction of measures to combat over-invoicing in May besides resulted in a severe deterioration in figures for exports to neighbouring countries. Exports to the USA and Europe, which had also improved in late 2012 and early 2013, have fallen again since March.

Manufacturing investment is also constrained by over-capacities that have worsened as a result of the 2008-2009 stimulus plan, particularly in some heavy industries (steel, cement) and new energy sectors. In the property sector, despite a rebound in volumes of sales (35% y/y over the first five months of 2013) and in house prices, the upturn in investment seen at the beginning of the year rapidly ran out of steam. Developers were discouraged by the announcement in March of new restrictive measures and by a lack of visibility over the government’s intentions. Lastly, consumer spending has lost momentum after holding up well throughout 2012. On the one hand, this resulted from an anti-corruption campaign within the government. On the other hand, growth in urban households’ income reached a standstill in Q1 2013, as a result of the deterioration in corporate profits in 2012.

The reasons for the recent slowdown are thus both cyclical and structural, with China having begun a transition towards a more moderate growth regime (see EcoPerspectives, 2nd Quarter 2013). However, the recent poor performance serves as a reminder that this transition is not without risks. In an unfavourable international environment, a sharp correction in private investment could result in a hard landing of the economy.

BY Christine PELTIER

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