Manufacturing continues to expand, according to the December Purchasing Managers’ Index compiled by HSBC (via Reuters), but its pace of expansion has started to slacken for the first time during this recovery. With our usual caveat about a single month’s figures, that may be taken as evidence for the widely held belief (ours included) that GDP growth will slow in 2011.
By how much is the question, of course. While we still believe that the answer will be, by not much, and that absent the implosion of any asset bubbles the economy is in good shape, the extent to which inflation moderates will play into the final outcome. There are signs inflation may have peaked. One factor will be the success of price and supply controls on food. But we are also starting to look at wage pressures on inflation. Minimum wages are due to rise again in the new year — they will rise by 20% in Beijing for example — and these increases will to some extent work their way up from the bottom rung of the pay ladder. We suspect now that we won’t see any further interest-rate rises until after the January numbers are in and policymakers get a better sight of the inflation-adjusted growth prospects. We are in no doubt though that fighting inflation remains the top policy priority. Monetary tightening by other means will continue.
We also think we are seeing a greater willingness in the meantime to let the exchange rate bear more of the burden of dealing with the excess liquidity that is the root cause of the inflation. That is all relative in the sense that policymakers remain opposed to any rapid appreciation of the yuan, but it is no accident that the currency is closing out the year at a high against the dollar.