LAST WEEK
China’s official manufacturing PMI index unexpectedly rose in January to 50.5 from 50.3 in December. Although the index remains only slightly above the 50 expansion level, there are some positive signs that the underlying momentum in the manufacturing sector will remain firm in the coming months, supporting our forecast of a moderate slowdown in Q1 GDP growth. In particular, output rose to 53.6 from 53.4 in December - its highest level since April 2011. New orders were also back above 50 for the first time since October 2011, although the decline in export orders suggests that this has been domestic demand driven. We continue to believe that the Chinese authorities will focus on delivering a ‘soft landing’, with bank reserve ratios to be cut three times in H1, followed by an interest rate cut.
The Russian economy grew by 4.8% y/y in Q4, unchanged from the previous quarter. Although the details have yet to be released, monthly data suggests that the key driver of growth was strong household spending. Notwithstanding the external headwinds facing the Russian economy this year we expect GDP growth of 3.9% supported by continued strength in household spending. Against this backdrop the central bank of Russia kept the refinancing interest rate unchanged at 8%. However, we maintain our view that the authorities will cut rates by 50bp this year.
THE WEEK AHEAD
Chinese consumer price inflation is forecast to have increased 1.0%m/m in January reflecting higher food prices during the Chinese New Year. However, the underlying trend in prices is moderating, and we look for the annual rate of inflation to be unchanged from December at 4.1%. A moderation in food prices in February coupled with lower costs is likely to lead to overall inflation falling below 4% in February and continuing to trend down for most of 2012 reflecting an easing in cost push pressures. We expect producer price inflation to have eased to 1.0% y/y in January from 1.7% in December reflecting lower commodity prices, in particular steel prices have fallen sharply in recent months. The marked slowdown in inflation, and an easing in industrial activity and exports, should allow the Chinese authorities to loosen monetary policy in 2012. We expect the bank reserve ratio to be cut by 100bp in H1 with a 25bp cut in the prime lending rate in mid-2012. Meanwhile, China’s trade surplus is forecast to narrow to $11.4bn in January from $16.5bn in December, reflecting weak external demand. The PMI export orders has recorded below 50 readings since October 2011. Nonetheless we still look for the authorities to manage a gradual appreciation in the yuan as part of their policy to control inflation and to meet their medium-term objective of rebalancing the economy towards domestic demand.
We expect Indian industrial production rose 6.3% y/y in January, from 5.9% in December. The recovery in manufacturing activity at a time when inflation in the sector is still running high suggests that interest rates are unlikely to be cut soon. Moreover, with manufacturers complaining of higher input costs it is unlikely that manufacturing inflation will ease in the near term. Anecdotal evidence suggests that some manufacturers are attempting to pass on some of their price rises with the biggest car manufacturer increasing prices by up to 3% in January and the second largest steel company increasing prices by up to 2%.
The sharp fall in South Korean exports in January highlight the risks facing the open economy. However, while the Bank of Korea has become increasingly concerned about growth prospects, we expect the benchmark interest rate will be kept unchanged at 3.25%. Despite the recent moderation in consumer price inflation (3.4% y/y in January from 4.2% in the previous month) we believe that inflationary pressures persist and the authorities will be conscious that inflationary expectations are still elevated. However, if the deterioration in exports continues into Q2 the authorities will start to cut rates.
We expect Bank Indonesia to keep its policy rate at 6% as 175bp of easing already in play is consistent with supporting solid domestic demand growth whilst maintaining inflation within its 3.5% to 5.5% target. The economy is forecast to have risen by a solid 6.3% y/y in Q4, from 6.5% in Q3, underpinned by strong domestic demand, in particular investment. However, in line with robust demand, import growth is also forecast to be buoyant and, coupled with a moderation in exports, net trade is expected to be a drag on growth. The Indonesian economy is forecast to be one of the star performers in the region growing 6.3% this year, from an estimated 6.5% in 2011.
