China: December PPI highlights risks of stagnation - Nomura

Research Team at Nomura notes that China’s producer price index (PPI) continued to strengthen in December, rising to a much higher than expected 5.5% y-o-y from 3.3% in November (Consensus: 4.6%; Nomura: 4.8%).

Key Quotes

“Inflation is not only evident in upstream industries but has also started to spread downstream, which points to a rising risk of PPI inflation passing through to CPI inflation.”

“CPI inflation moderated slightly to 2.1% y-o-y in December from 2.3% in November (Consensus: 2.2%; Nomura: 2.0%), with food price inflation weaker than the historical average, while non-food price inflation picked up. Inflation in the residence and service components was resilient – a sign of high property prices passing through to the CPI, in our view.”

“Based on the higher-than-expected PPI reading, we revise up our 2017 PPI inflation forecast to 4.4% from 1.0%, and also our CPI inflation forecast to 2.6% from 2.4%.”

“We expect nominal GDP growth to rebound in 2017, mainly driven by higher inflation. However, we are not changing our forecast of 6.5% real GDP growth in 2017, compared to the forecast of 6.7% in 2016. There are still plenty of headwinds to economic growth coming from a cooling property market and policymakers’ commitments to deleverage the economy. In addition, a rising inflation outlook adds to risks of monetary tightening, which may further limit growth.” 

“Given our outlook for higher inflation while the growth outlook remains lacklustre, we believe China’s economy is likely to head into a period of stagnation in 2017.”