Strong headline growth; growing underlying imbalances
Special points to highlight in this report:
- China’s 5.0% GDP growth in Q1 looks solid, but as always, it is driven mainly by production rather than consumption. Industrial output remains strong while retail sales and household income lagged even more than expected, widening the gap between production and demand. There is no evidence yet that China's promises during the Two Sessions meetings to raise consumption are working.
- March data show a sharp drop in the trade surplus due to weak export growth and surging imports (partly from higher commodity prices). The important question is whether surging imports were driven mainly by stronger domestic demand or higher import prices. It is too soon to tell, of course, but the latter seems a lot more likely.
- With consumption weak and the trade surplus shrinking, China is relying on infrastructure investment to sustain growth, something I have been expecting since late last year. While this only adds to excess capacity and rising debt, allowing growth targets to be met only by exacerbating excess infrastructure capacity, it does have positive implications for industrial commodities.
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