BEIJING (Reuters) - The scale of economic slowdown underway in China will become clearer on Friday with data set to show steady consumer spending as factory output, fixed asset investment and inflation cool to leave a pro-growth policy bias intact.
Expectations that China will further loosen monetary policy are likely to be reinforced if data shows annual inflation eased in line with the consensus view to 1-1/2-year lows in February and factory output fell back to August 2009 levels.
Investors remain tense after tremors triggered in global financial markets this week when Beijing cut its 2012 growth forecast to an eight-year low of 7.5 percent, a move made in part to make space for economic reform, but which sparked fresh fears of an abrupt slowdown — a so-called “hard landing”.
“People want to stress-test that hard-landing scenario for China,” Tim Condon, head of Asian economic research at ING in Singapore, told Reuters. “But they always soft-land.”
Condon said he expects the world’s No. 2 economy to grow at least 8.5 percent this year, a level that “certainly qualifies as a soft-landing”.
A lot will be read into Friday’s flurry of data, which are the first set of hard numbers of the year for industrial output, fixed asset investment and retail sales. They will combine data held back from January because of the heavy distortions caused by the Lunar New Year holidays.
Consumer and producer price data are due at 0130 GMT, with fixed asset investment, industrial output and retail sales numbers scheduled for publication at 0530 GMT.
Factory output may underscore the downside risks, with economists forecasting growth of 12.3 percent from a year ago, the weakest since August 2009 when the world was still shuddering from effects of the global financial crisis.
Fixed asset investment, which accounted for 54 percent of China’s economic growth in 2011, is forecast to have grown 20 percent in the first two months.
That would be its lowest level since December 2002’s 17.4 percent, but an encouraging sign for policymakers keen to cut dependence on investment spending for growth, which generates both over-capacity and speculative bubbles.
Retail sales meanwhile are forecast to have grown 17.4 percent in February from a year earlier.
The slowdown in activity, alongside relatively tight monetary conditions and easing food price pressures, should see the annual rate of consumer inflation dip to 3.4 percent, comfortably within Beijing’s 2012 target of 4 percent.
Analysts say abating price pressures give Beijing room to loosen policy and reduce the amount of cash commercial banks must hold as reserves at the central bank.
A Reuters poll in December showed economists expect Beijing to lower banks’ required reserve ratio (RRR) by 200 basis points in 2012. The central bank cut RRR by 50 bps in February after cutting 50 bps off the ratio in November.
But widespread expectations for easier policy have not fuelled bets for an outright interest rate cut. In contrast, Brazil slashed its interest rates by a surprisingly large 75 bps on Thursday to support economic recovery and restrain a strong currency that is stifling its industry sector.
Barring a spike in world commodity prices, analysts say China’s inflation should stay muted for all of 2012 as high comparison figures a year ago force food inflation to slow.
Economists estimate food prices represent 30 percent of China’s consumer price index, the composition of which is kept secret.
Even if oil prices rebound to breach 10-month highs of over $124, it has little direct impact on China’s inflation as gasoline accounts for an estimated 2 percent of the consumer price index, Mark Williams from Capital Economics said.
“High oil prices affect production costs more widely, but the total pass-through from oil prices to consumer prices is still small,” he said.
And even though factory production likely hit multi-month lows in February, some economists are hopeful the worst is over.
They note China’s official Purchasing Managers’ Index has improved for three straight months to hold above 50 points, an indication the manufacturing sector is growing.
“So despite all the weak anecdotal evidence, we think the economy is holding up just fine and activity data to be released this Friday is likely to surprise the market on the upside,” Yu Song, a Goldman Sachs analyst, said in a note to clients.
Reporting by Koh Gui Qing; Editing by Sanjeev Miglani