China's struggles argue for stimulus all round

By Reuters

May 01, 2015 10:13 AM EDT

China's factories stayed stuck in the slow lane in April while Japanese output went into reverse and South Korea suffered its worst export performance in two years, adding urgency to calls for more state stimulus in all three economies.

Thailand has already surprised by cutting interest rates this week, while speculation is mounting that the Reserve Bank of Australia (RBA) will chop its rates to a record low of 2 percent at a May 5 policy meeting.

The need for action is all the greater as China, the former engine of global growth, remains jammed in neutral.

China's official Purchasing Managers' Index (PMI) held at 50.1 in April, just a fraction above the 50-point mark that separates growth from contraction on a monthly basis.

"As the economy still faces strong headwinds and the risk of deflation has not diminished, the authorities will need to continue to roll out easing measures in the coming months," said Li-Gang Liu, chief economist for Greater China at ANZ.

Following an aggressive one-percentage-point cut in banks' reserve requirement ratios last month, ANZ expects China's central bank will lower its interest rates further this quarter.

China's annual economic growth slowed to a six-year low of 7 percent in the first quarter, hurt by a housing slump and a downturn in investment and manufacturing.

In just the latest effort to turn the ship around, China's cabinet unveiled new measures on Friday to boost employment, offering more flexible tax breaks to companies to hire and preferential loans to business starters.

Beijing aims to create at least 10 million new jobs in 2015 and keep the urban jobless rate below 4.5 percent.


In Japan, the Markit/JMMA version of the PMI fell to 49.9 in April, from 50.3 in March, taking it into contractionary territory for the first time since May last year.

Japan is emerging from recession at a snail's pace as companies remain wary of ramping up spending despite record profits and consumers keep their wallets shut.

That is challenging the Bank of Japan's bold pledge to accelerate inflation to 2 percent through massive money printing.

While core inflation did edge up a tick to an annual 2.2 percent in April, it is set to fall back toward zero in May when the impact of last year's rise in sales taxes drop out.

Neither have wages benefited as the BOJ hoped. Data out on Friday showed wage earners' total cash earnings were almost flat in March and inflation-adjusted real wages marked a two-year stretch of declines.

Across in South Korea, government figures showed exports fell 8.1 percent in April from a year earlier, the sharpest drop since February 2013, as shipments to China, the United States and the European Union all lost ground.

Consumer price inflation there is running at a 16-year trough of just 0.4 percent.

"The government will be sure to focus policy on boosting consumption as exports are no longer performing as they did in the past," said Stephen Lee, an economist at Samsung Securities.

The doleful data follows news the United States grew a bare 0.2 percent annualized in the first quarter of the year, held back by wild weather, a port strike and a strong dollar.

Yet there were glints of light in more recent data.

The number of Americans filing new claims for jobless benefits fell to a 15-year low last week and consumer spending rose in March, aided in part by a pick up in wage growth.

An upturn in wages has long been a key goal of the Federal Reserve and revived market expectations that interest rates would start to rise later this year, albeit not until September at the earliest.

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