China's economy is slowing down. After years in which growth seemed only to go up, the pace of growth is moderating, affected by the global slowdown and tightening measures introduced since the fall of 2007 to contain inflation. Nonetheless, data for August on investment and exports surprised on the upside and on current projections the economy is on track to slow down to a still robust pace in line with short run potential growth of about 10 % in 2008. This is after 2 years with growth of almost 12 %, significantly higher than potential growth.
Given current weak global prospects, we project GDP growth to diminish further to around 9 % in 2009, even as China's domestic economy is holding up well. This provides some cooling of demand and price pressures that is helpful against a background of still lingering inflation concerns. Headline inflation has receded to below 5 % in August on the back of low food price inflation, but additional inflation pressure from higher energy and raw material prices is in the pipeline, and oil prices are still much higher than a year ago.
In our view, it would make sense to consider and discuss a stimulus package, although it still seems too early to implement a major package now. On current projections for the world economy--that is, with weak growth in the developed world, but still reasonable global growth--current developments in China do in our view not yet warrant a significant change in the macro policy stance.