We have maintained a below consensus view on Chinese economic growth since this time last year. The Reserve Bank of Australia appeared to start 2011 with an optimistic outlook, began to recognise a moderate slowing in the third quarter, downgraded prospects late in the year and have seemingly become a little more optimistic of late. In this essay we track the evolution of the Reserve Bank’s ‘one-liners’ on China to get a feel for how their perception was shifting relative to our ‘fixed’ position.
In early 2011, we forecast that Chinese growth would be just 8.25 per cent in 2012. By way of comparison, the private sector consensus at the time was for 8.9 per cent, the Chinese Academy of Social Sciences (CASS) was at 9.0 per cent, the IMF was at 9.5 per cent and the OECD was at 9.7 per cent. The Reserve Bank of Australia’s view in the February 2011 Statement on Monetary Policy was that "In the central scenario, growth is projected to remain strong in China [and India]”, which implies essential agreement with the multilateral forecasters. The Australian Federal Treasury used a nine per cent assumption in their May 2011 Budget. Suffice to say we were a long way from the collective wisdom of both marketeers and policymakers. That was one of the factors that encouraged us to call rate cuts in Australia in the second half of last year.
A year has now passed and our view remains on the lower side of consensus for growth in 2012. However, the collective wisdom has ratcheted down considerably, and the majority of private sector forecasters now expect an outcome in the low eight per cent area, our original position of a year ago. We are presently at 7.75 per cent following China’s December quarter national accounts. By way of comparison the IMF is at 8.2 per cent; CASS is at 8.7 per cent; the OECD is at 8.5 per cent and the Australian Federal Treasury used an 8.25 per cent assumption in their MYEFO report. As for the Reserve Bank, the February 2012 SoMP again expressed essential agreement with the IMF’s view of the world, while noting that "The Chinese economy continues to record strong growth”.
The above history of ‘black and white’ forecasting positions (ex the usual catalogue of caveats, asterisks and ‘balances of risks’ we economists like to use to blur the story) shows clearly that our view on China has been distinctly different from that of the RBA for most of the last year.
In this foregoing analysis we draw principally on the statements issued by the governor in the wake of policy decisions, rather than on other sources like the minutes or the quarterly statements on monetary policy, as we feel it is these that do the most to communicate the RBA’s position to the markets. Building on that analysis, figure 1 below plots the spot iron ore price with RBA meeting dates marked. Figure 2 gives the commentary the bank offered on China/Asia following each meeting. Here are some of the key points extracted from the analysis:
1. The main prism through which the RBA views China is that of commodity prices. For example, see September, where China is the second clause in a statement opening with an observation on commodities. "Prices for key Australian commodities have remained very high thus far, with growth in China continuing to look solid.”
2. Having spent much of the first half of 2011 avoiding explicit commentary on China as they tracked the supply chain impacts of the Japanese earthquake, it came back onto the radar screen early in the third quarter and stayed there, front and centre.
3. From August-October, the bank’s view on China was in transition. Over this period it had replaced the adjective "strong” with "solid”, it referred for the first time to a "slowdown”, and in October it refrained from doing anything more specific than noting China was "continuing to expand” while recognising a general downward revision to world growth forecasts from above trend to "about average".
4. The two meetings of November and December, which of course included rate cuts, were more forthright in their commentary, noting both an overall slowing and an overlay of weakening trade. In November we had "China's growth has slowed, as policymakers there had intended.” In December we had basically the same line, but with a more downbeat assessment of the impact of a "significant” slowing in European growth. And in the November 2011 statement on monetary policy the bank moved to a more nuanced position, highlighting the ability for policy restraint to be lessened if required.
5. The February commentary repeated the 2011 second-half refrain that "Growth in China has moderated as was intended ...”, but added the somewhat bullish rider: " ... but on most indicators remained quite robust through the second half of last year.” The bank was clearly impressed with the December-quarter GDP figures and the resilience of iron ore prices early in the year, while simultaneously downgrading the probability of a European implosion and all that would mean for an important trading economy such as China. One might infer from this that some of the potential downside risks that the bank may have been harbouring internally on China had been pushed into the background.
That brings us to the current juncture and the line from the February 2012 statement on monetary policy that "The Chinese economy continues to record strong growth”. Unless one indulges in semantics on the nature of the word ‘record’, we cannot agree with that assessment. It would appear that the bank is placing great emphasis on the GDP figures and downgrading the importance of partial official data and other proxies of demand. Of course, regular readers of our research will know that we take the opposite approach, preferring to consult a range of public and private data series, singly and collectively, and thereby judge how realistic the GDP numbers are at any given time.
Our reading of the fourth quarter GDP figure was that it clearly overstated aggregate demand. That said, the unassailable argument that the bank has on its side is the fact that iron ore prices have held up remarkably well.
Looking ahead, we anticipate that the Chinese data flow will be an eyesore for most of the first half. However, if we are to take seriously the inferences of the above analysis – that the RBA is most interested in the iron ore price and the GDP figures – then we cannot rely solely on underwhelming outturns in the higher frequency data to sway their thinking. March-quarter GDP (due mid April, so available ahead of the May meeting where we anticipate a cut) will have to show a material deceleration and iron ore prices will probably have to be down from their Jan-Feb levels as well if the bank is to revisit the anxiety it apparently felt in regards to Chinese growth late last year.
Huw McKay is Westpac's senior international economist.