By John Richardson
CHINA’S economy is now showing signs of extreme weakness, according official year-on-year data for January-February:
- Fixed asset investment, the biggest driver of growth in China’s economy, rose by 13.9% – the weakest rate of expansion since 2001.
- The 6.8% year-over-year growth in industrial production was “the weakest year-over-year reading ever outside the global financial crisis,” according to Goldman Sachs. (China’s industrial production data starts from 1995)
- Retail sales grew by 10.7%, the lowest in over nine years, according to IHS.
- The Producer Price Index fell 4.8% (see the above chart), the steepest drop since 2009.
- Electricity consumption rose just 1.9%, the weakest in 16 years.
- Job creation declined, resulting in a government minister warning that: “Against a backdrop of slower economic growth and increasing downward pressure on the economy because of industrial restructuring, this year’s employment situation will be even more complex and grim.”
- Housing sales, measured by floor space, fell by 16.3%
Economic forecasts for the full-year 2015 are also cause for great concern.
For example, JP Morgan’s chief economist expects land sales to fall by 30%. This would blow a big hole in the revenues of local governments, making it very hard for them to stimulate their way out of this crisis, assuming, of course – and this would be entirely the wrong assumption - that they would be allowed to do so.
What you instead need to focus on is not stimulus, but the success or failure of central government efforts to fill this local government revenue shortfall. Failure to fill the gap would, of course, further weaken overall economic growth.
The JP Morgan forecast is also a further important indication of the severity of the real-state slowdown – and again its impact on overall economic growth.
China’s leaders have to give themselves more time, more political breathing space, to complete a brilliantly conceived economic reform programme that can unlock huge, sustainable growth in the future.
We know that this breathing space simply cannot be provided by more “old style” stimulus as this wouldn’t work anyway – and such stimulus would run counter to the entire reform programme.
So what’s the answer? China’s answer will be the one already chosen by Japan and the EU as they, too, seek the breathing space for longer-term reforms: Exports.
The end result can only be much more very harmful global deflation.