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India, China cool in the height of summer

June 1, 2011

The world constantly measures the temperatures of the Chinese and Indian economies to assuage the general health of the global economy, so a slight cooling down this summer has sent shivers worldwide.

According to recent industrial data released by both governments the Chinese and Indian economies are slowing down . High prices and higher interest rates have reduced consumption, dropping production. India announced its economy grew 7.8 percent in the January-through-March period from a year earlier, compared with 9.4 percent in the same quarter last year and slower than the 8.3 percent rate in the last three months of 2010. In China, the seasonally adjusted HSBC Purchasing Managers’ Index (PMI) dropped to a ten-month low of 51.6 in May, down from 51.8 in April, signalling only a modest improvement in manufacturing sector operating conditions. One of the most obvious signs of two economies decelerating is the automobile market – after two years of record automobile sales in the largest car markets, China and India, growth has slowed.

Analysts however are not worried, crediting the soft landing to measured government steps to reign in inflation, by raising interest rates a decision taken four months ago. Now that inflation has cooled, the economies are not falling, but are stabilizing they say.

“I’m pretty confident this is a soft landing,” Frederic Neumann, Asia economist for HSBC in Hong Kong, told the Wall Street Journal. “The bottom is not falling out. Despite the slowdown in industrial activity, the fundamental drivers of global recovery are in place,” he said. Neumann attributes part of the slowdown to the cyclical ebbs and flows of the corporate inventory cycle. Businesses produced too many goods in late 2010 and are now facing oversupply, so have cut back production. But underlying demand will remain healthy as long as labor markets continue to improve.

Following Neumann’s theory on the cyclical ebbs and flows of the market, indicators signal that wages and input costs are on the rise again, commencing another inflation spiral as prices of oil and iron ore rise, leading to prices rises across all consumer goods and services. Both India and China are expected to announce further interest rate hikes to cool down the 8.7 percent and 5.3 percent inflation that has been ballooning, taking us back to the Goldilocks argument where China and India’s economy like the porridge is always too hot or too cold!

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