World waits for China to balance growth
London, October 14, 2013
China's monthly data spray is likely to show a pick-up in the world's second-largest economy but precious little evidence of a shift in growth towards consumption from credit-fueled investment.
Rebalancing in China is one of three major preconditions of sustainable global growth in the longer term. The others are a plan to rein in and finance US entitlement spending and, in the euro zone, the construction of a solid institutional foundation for the single currency, including a banking union.
Frustratingly little progress is being made on any of these fronts.
Wrangling in Washington over a new budget and an increase in the debt ceiling offers scant hope of a breakthrough on tax-and-spend issues that do not demand immediate attention in this electoral cycle.
Euro zone finance ministers will meet to review progress on various aspects of banking union, but the important political decisions, not least who should wield power to close down ailing banks, are far from being settled.
As for China, annual gross domestic product growth is likely to have accelerated to 7.8 percent last quarter from 7.5 percent in the second quarter, according to economists polled by Reuters.
That would be positive on the face of it, but the details are likely to show no slowing in investment - in everything from factories to infrastructure and housing - and no quickening in retail sales. The figures come out on Oct 18.
"It just puts back the timing for China's imbalances to play out: we're just not seeing anything in the hard data that shows any change in the underlying pattern of growth," said Jeremy Lawson, an economist with Standard Life in Edinburgh.
NO PAIN, NO REBALANCING
The longer Beijing delays the transition to consumer-led growth, the greater the risk that excessive investment will eventually result in a hard landing that would be bad for China and for the global economy.
"You choose when to take your pain," Lawson said. "The optimum choice for the rest of the world is that gradual rebalancing starts immediately."
Although China on Saturday reported a surprising year-on-year fall in September exports, Premier Li Keqiang has already said that GDP growth in the first nine months should exceed 7.5 percent, keeping the country on course to hit its full-year target of 7.5 percent.
Bill Adams, an economist with PNC in Pittsburgh, sees a relatively small risk of a significant downturn in China.
Double-digit property price rises in major cities show that China's housing market is "back with a vengeance", underscoring the government's dilemma of how to dampen the sector without abruptly choking off overall investment, Adams said.
"They don't have an answer to that yet, but I don't think they see the problem as so dire that they're going to slow the economy much more," he said.
WATCHING FOR SPILLOVERS
In the US, a pair of regional Federal Reserve surveys will command more attention than usual given that scheduled government data releases are likely to be delayed even assuming a short-term deal is reached to avert a debt default.
The New York Fed's manufacturing survey is likely to rise slightly, while the Philadelphia Fed's business index is expected to fall back after a big jump the month before.
Washington's budget standoff has not had a cataclysmic impact on the rest of the world, not least because markets assume it will prompt the Fed to further delay winding down its $85 billion a month bond-buying programme.
US consumer confidence has been dented only slightly by the political shenanigans, Friday's University of Michigan survey showed, and forecasters see no spillover to Germany's ZEW economic sentiment index, which is forecast to be unchanged.
But Jonathan Loynes with Capital Economics, a London consultancy, said the episode had injected additional uncertainty into the outlook at a time when the euro zone's recovery was still fragile.
Britain's revival has been much more impressive than the euro zone's and economists are waiting for September's retail sales data - the market expects a 0.4 percent rise - before finalising their forecasts for third-quarter GDP due on Oct. 25.
JP Morgan said its tracking estimate based on already released data points to quarterly growth of 0.7 percent, the same as in the second quarter and an annualised rate of 2.8 percent, while Investec for now is pencilling in 0.8 percent. - Reuters
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