From the FT:
In the first quarter of the year, China’s deflator turned negative for the second time since 2000, coming in at -1.1 per cent. In comparison, consumer price inflation was +1.2 per cent. This means its inflation gap has jumped to 2.3 percentage points, even as it has fallen sharply in the likes of the US, as the chart shows. If the deflator is, as a result, understated, then real GDP growth is overstated by the same amount.
“A reasonable guess might be that true inflation was 1-2 percentage points higher than the deflator shows. In that case, real GDP growth in Q1 would have been 5-6 per cent [rather than 7 per cent],” said Cang Liu, China economist at Capital Economics, who added that the lower rate was closer to Capital Economics’ own estimate, based on activity data, of 4.9 per cent.
Again from the FT:
Sheng Laiyun, NBS spokesman, declined to say what the deflator was for China’s second-quarter growth figure, which also came in at 7 per cent. But analysts calculate that it has stabilised at 0.1 per cent, compared with -1.2 per cent in the first quarter.
…“The inconsistency between the GDP deflator and other price measures seems to have gone away in the second quarter, after having been rather extreme in the first quarter,” says Andrew Batson at Gavekal Dragonomics, a Beijing research house.
Andrew Polk, resident economist at the Conference Board think-tank in Beijing, noted that there had been a similarly sharp upwards adjustment in the deflator between the first and second quarters of 2014.
Mr Sheng said the NBS had done “diligent research” on doubts raised by other analysts about China’s deflator series, adding they had “a lack of understanding about our calculation methods”.
“There is room for improvement,” he said. “But in general China’s GDP deflator hasn’t been underestimated, nor has GDP growth been overstated. Both objectively reflect the real situation.”
Perhaps the best way out is to ignore the deflator and use nominal numbers which expanded at 7.1% in the second quarter up from 5.8% in the first. These rates are comparable with the worst quarters of the GFC and look like a pretty hard old landing to me.
