In this briefing:
1. China Economics: The Bubble that Bursts the Demand
China’s 4Q GDP grew just 6.4% in Q4, 2018, the lowest since the Global Financial Crisis (GFC). We do not believe the number matched the market expectation, however. Since the GFC, every rebound of the Chinese economy has been accompanied with the rebound of the real estate sector (such as in 2009, in 2012 and in 2016). However, this time is different, in our view. The real estate sector only grew 2% in Q4, 2018, the lowest in 4 years.
If the Chinese government had relaxed its regulation on this sector, China would have grown higher, but that would be at the expense of bigger bubble-driven growth, in our judgment. As we argued before, the consumption growth is closely-corelated with the wealth effect from real estate market. Accordingly, as to the questions such as why the Chinese economy has slowed down, and why Chinese consumption has declined, we believe the answer lies in the real estate sector. As a result, this has become a matter of real estate bubble versus consumption, the debacle we believe will last at least this year.
In addition, the industrial-value added growth, infrastructure investment, electricity generation and retail sales as well, have all marginally rebounded in December. China’s growth may finally rebound in the second quarter of 2019.
2. Preview: BoE Temporarily Tolerant of Excesses
- Political uncertainty continues to constrain the MPC, which looks set to unanimously announce no change in policy at its February Inflation Report.
- Looser monetary conditions are likely to offset the disinflationary effect of energy price weakness and raise the Bank’s medium-term inflation forecasts slightly. Ongoing excess inflation and excess demand is an uncomfortably hawkish forecast.
- Rather than risk perceptions of the MPC’s reaction function shifting, I expect the MPC to indicate its tolerance is only temporarily increased. That is a reasonable policy amid a Brexit-related risk and forecast inconsistency that biases up excesses.
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