A sharp rise in inflation in March and the March quarter has pushed China closer towards the worst of all economic situations – stagflation – where growth slows and inflation and costs rise, eating into business and consumer costs and confidence in a way that can cripple an economy.
News of the higher than forecast inflation data and the worsening of the Covid wave in Shanghai knocked more than 4% from share prices in China and Hong Kong on Monday and Tuesday as investor focus moved to focus on today’s trade data and next week’s first quarter GDP report.
Not helping was news that China’s Premier Li Keqiang had issued a third warning about economic growth risks for the economy in less than a week.
Authorities should “add a sense of urgency” when implementing existing policies, Li was reported as telling local authorities at a seminar Monday.
The comments come days after similar warnings from Li, highlighting the toll the economy is taking from lockdowns and other virus control measures imposed to curb the latest wave of omicron outbreaks.
Economists at Nomura Holdings say the risk of recession is rising in China, estimating that about 373 million people in 45 cities are now under full or partial lockdown, making up 40% of China’s gross domestic product.
Even if China avoids outright recession in coming months, it is looking increasingly like having to endure a bout of stagflation. A ,major interest rate cut by China’s central bank is also increasingly likely.
China’s 2021 economic growth was 5.1% but it slowed to an annual rate of 4% in the final three months (from more than 13% in the first half) and there’s been a further slowing in activity in March according to government and private surveys of manufacturing and services which saw a marked slowing to contractionary levels of activity in the month.
The early forecasts for March quarter GDP are for growth around 3.6% but this is before today’s major release of trade data for last month and the March quarter.
Analysts say the import data today will confirm the inflationary impact of the global price surge since the late February invasion of Ukraine. it has already had an impact on consumer prices and on producer costs.
The import bill will reflect the rapid surge in oil, gas and coal prices in March will should send the value of imports sharply higher, along with the rise in prices key minerals such as copper, nickel and iron ore.
Don’t be surprised a move by China to cut import volumes to ease cost pressures while the higher import bill will put downward pressure on the size of the country’s still high trade surplus.
The impact of the surge in global inflation was seen in China’s March Consumer Price Index – it was forecast to rise by an annual rate of 1.2% in March – from 0.9% in February and January – after price rises for oil, diesel and several other products were allowed to be passed by the central government.
That proved to be an underestimate as the CPI jumped at an annual 1.5% rate, taking the growth rate back to where it was last November due to surges in prices of gasoline (24.6%), diesel (26.9%), and liquefied petroleum (27.1%).
Those rises more than outpaced a smaller fall in food prices (-1.5% vs -3.9% in February). On a monthly basis, consumer prices were flat as lockdowns and other restrictions took the heat of of consumption in some of 29 provinces and major cities. While it was a better outcome than the 0.6% rise in February, prices did not fall month on month as the market had expected.
For the March quarter China’s CPI was up 1.1%, well above the 0.9% rate for all of 2021 but still well short of the official target for the year of 3%.
While China’s producer inflation rose by an annual 8.3% from a year ago, above forecasts for a rise of 7.9% it was still lower than the 8.8% in February.
March was the lowest reading since April last year and reflected the government crackdown on prices of key commodities such as coal and iron ore (though it has broken free of the previous levels to remain above $US150 a tonne).
On a monthly basis it was a different story with producer prices increasing by 1.1% in March and reflecting those energy price rises.
That was more than double the 0.50% rise in February and tells a story that the much-vaunted crackdown on prices and alleged rorts by the government had little lasting impact.
For the first three months of the year, China’s factory gate prices grew by a high 8.7%.
