Earlier in the month, a manufacturing Purchasing Managers’ Index (PMI) produced by HSBC indicated that the sector had gathered momentum, easing fears of a slow-down in the world’s second largest economy. That indication has now been confirmed by Chinese data with the Official PMI rising from 50.3 for July to 51 for last month. On this scale, any figure above 50 indicates expansion.
The figures will provide hope that the “slowdown” in the Chinese economy will be reversed in the third quarter. Growth slowed from 7.7% in Q1 to 7.5% in Q2 on the back of faltering demand in China’s major export markets of Europe, Japan and the USA because of the weakness of the recovery in those regions. Sino-Japanese relations seem to have eased in recent weeks with both sides refraining from making bellicose statements over the sovereignty of islands in the East China Sea that both nations claim. Japan and China are major trading partners, so the dispute stands to hurt the interests of both parties.
In Japan, some progress has been made towards the goal of ending deflation and establishing “healthy” inflation which is targeted by the Central Bank of Japan (BOJ) as 2%. The consumer price index has picked up to stand at 0.7% year-on-year for August (excluding food inflation). Whilst, on the face of it, this is good news, it is really the wrong type of cost increase since the bulk of the change was due to higher prices for fuel imports which are priced in Dollars. A year ago, the Dollar would buy 78.39 Yen whereas it is currently trading at 98.89 to the Yen. What the BOJ wants to see is a small, healthy increase in the cost of consumer goods within Japan since this would end the spiral of deflation which stymies domestic demand as consumers delay major purchases in the knowledge that goods will be cheaper at a future date.