When we asked readers at the start of the year about their outlook for 2012, the most popular response was that “growth will be even worse than expected”. As we wrote at the time, growth estimates at the start of the year were 7% for the region and 8.6% for China. Our readers were right on the money.
Having established a flawless record in economic prediction, we decided last week to ask about the outlook for the second half. Looking at the results, we take some cheer from the fact that the consensus fell in the optimistic camp.
More than a third of respondents said they were cautious and almost a quarter were unashamedly optimistic, while just 10% said they were retiring early (the chance would be a fine thing!). However, we checked our impulse to punt the FinanceAsia retirement fund on Hang Seng Index futures. After all, more than a quarter of voters said they were pessimistic.
It is easy to understand why. China’s central bank seemed to be coordinating a global monetary easing campaign with its counterparts in the EU and the UK last week, springing a surprise 31bp cut to the key lending rate — its second rate cut in a month — bringing the benchmark down to 6%.
(Incidentally, nobody would have been more surprised by that move than former Barclays CEO Bob Diamond, whose staff seemed to think that central banks adjust interest rates by making suggestive phone calls to bank bosses.)
Chinese officials are comfortable cutting rates because inflation continues to fall. Consumer prices rose by just 2.2% in June, down from 3% in May. That leaves plenty of room for further easing, according to some commentators, though it is increasingly clear that China’s slowdown is being caused by a sharp fall in demand.
Indeed, producer prices dropped to a 31-month low in June after four months of deflation, led by weak demand from embattled end-consumers in the US and Europe. Consumer prices may be headed in the same direction.
That may at least help China fulfil its promise to stimulate consumer demand. At around 35% of its economy, consumption in China makes a frighteningly low contribution to growth. Lower prices make life more affordable for most Chinese people, but deflation would be a disaster for the country’s indebted provincial governments and state-owned enterprises.
Given this prospect, China is expected to continue easing. And, with few other options on the table, it will probably give in to temptation and roll back curbs on property investment in hope of reflating the economy.
Officials will reveal China’s second-quarter GDP data on Friday and expectations are that it will be the worst print since the first quarter of 2009, the period immediately after Lehman Brothers went bankrupt.
The consensus is for growth of about 7.5% and markets will be extremely sensitive to anything below that, even though few people place much faith in a number that is produced in just two weeks (faster even than Hong Kong).
So, while we appreciate the sentiments of our optimistic readers, we also share the concerns of the bearish element. There are brighter spots elsewhere in Asia, of course, which may account for the difference in outlook. But there are also bleak signals in Japan and India, the region’s two biggest economies after China. Such headwinds will make it tough even for the region’s well-trimmed economies.