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CHINA Here’s one on the right track China’s Q1 GDP growth may seem small, but it serves as evidence that the government’s plan is working. Monthly data seem to confirm that a recovery is underway. It could even have long-term benefits, but it is not without risks. We doubt, however, that China is strong enough to lift the rest of the world. Q1 growth may seem low, but it suggests government’s program is on track China’s Q1 statistics indicate that the government’s plan is working. The 6.1 percent y-o-y GDP growth rate represents a deceleration from the 6.8 percent in Q4. It is also the weakest growth rate since quarterly statistics started at the beginning of this decade. However, y-o-y growth rates, which are the only GDP growth statistics China publishes, normally take some time to decelerate in a slowdown because they show changes from the same period a year ago. Growth was still super-high in the beginning of last year, so this year’s Q1 growth figure states the change from the extremely high level in Q1 2008. We thus interpret the modest drop in the y-o-y rate in Q1 from Q4 as a sign of stabilisation. GDP growth Percentage change y-o-y Percentage change y-o-y Source: Reuters Ecowin China the first country with PMI rising above 50 March data promising This interpretation is supported by promising data for March. The official PMI, which has been increasing since the November bottom of 38.8, rose to 52.4, making China the first country to break above the 50 line this time around. The industrial production y-o-y growth rate had dropped to 5.4 percent in November and hardly recovered at all in December and January, but it improved nicely to 11 percent in February and 8.3 percent in March (the February jump may have been a blip because of this year’s early Lunar New Year). Key macroeconomic indicators Percentage change 2007 2008 2009f 2010f 2011f GDP 13.0 9.0 7.5 8.0 8.0 Source: <strong>Handelsbanken</strong> Capital Markets Electricity and auto sales rebounding Auto sales surged to a record high of 685,000 vehicles, and even electricity production, which caused so much consternation by its outright fall last year, seems to be rebounding. 32 April 28, 2009
Industry accounts for 70 percent of all electricity consumption, and heavy industries, like steel and aluminium, in turn account for much of this. Unlike some other analysts, we do not interpret last year’s decline as indicating that the overall economic decline is in excess of the official data, but rather as a specific retreat in heavy industry. Similarly, we now take the rebound in electricity as an indication that these industries are coming back. Their pause was most likely caused by the significant slowdown in fixed investment from the middle of last year, and this movement was most likely exacerbated by a sizeable inventory correction. Much of this correction now appears to be over, as indicated by the rebound in imports. Manufacturing Electricity and auto sales Source: Reuters Ecowin How the stimulus works The stimulus programme has also been met by another kind of scepticism, namely that the items set aside in the government’s budget are too small and that the stimulation will be short-lived. This scepticism may not be entirely unwarranted; but it also seems to be based on some misunderstandings. Bank lending Foreign trade Source: Reuters Ecowin Plan working via regional governments, SOEs, and banks Firstly, it is important to realise that the investment programme (as it is called in Beijing) does not rely exclusively, or even primarily, on spending by the central government. Rather, in a system that is still fairly centrally planned, it is enough for the central government to OK expansionary plans by regional and local governments, as well as state-owned enterprises. Importantly, the government exercises considerable control over bank lending volumes. April 28, 2009 33
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Page 4 and 5: INTRODUCTION Who will pull the worl
Page 6 and 7: Emerging economies have been badly
Page 8 and 9: Consumer spending rebounded in Q1 U
Page 10 and 11: tion is due to the fall in oil pric
Page 12 and 13: The pattern evident in fourth quart
Page 14 and 15: Inflation forecast GDP forecast Sou
Page 16 and 17: Heavy falls in Investment and expor
Page 18 and 19: three quarters, the most rapid incr
Page 20 and 21: Gov’t finances and unemployment S
Page 22 and 23: this outlook, we also sketch an alt
Page 24 and 25: Finnish households have reduced the
Page 26 and 27: to the European Commission, capacit
Page 28 and 29: JAPAN Three more years of slump The
Page 30 and 31: EASTERN EUROPE Troubling times East
Page 34 and 35: Highly restrictive lending quotas w
Page 36 and 37: Slowdown to 5 percent growth in 200
Page 38 and 39: Aggressive cutting to catch-up with
Page 40 and 41: The ECB could adopt a policy of cre
Page 42 and 43: MONEY AND INFLATION Money matters W
Page 44 and 45: Money & price level in pooled data:
Page 46 and 47: spiral taking hold. In the late 199
Page 48 and 49: Global currency and interest rate f

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