Currency Watch: China’s slowdown starts to ease

The signs of a bottoming out in the slowdown in Chinese growth after nearly two years of gradual declines are starting to appear.

Chinese GDP came in on estimate at 7.4%, the lowest since Q1 2009, easing concerns that the economy would continue to slip further away.

This levelling out will help ease pressure on the political leadership ahead of the transition in November but the propensity for further stimulus will remain. While we may not see the interest rate cut further in China anytime soon, the RRR still remains the way that the central bank likes to influence demand and we expect at least one more cut to this through the end of the year.

Whilst the Chinese government will hardly be breaking out the bubbly to celebrate, they were reported to be satisfied that the recent downward trend was showing some positive signs of stabilising.

Of course the decline is China is nothing compared to the recessionary pressure currently being experienced in the Eurozone. However, steady Chinese growth will probably act as a small tonic to these problems.

The most obvious beneficiary of Chinese strength is Australia. And the Aussie dollar ran higher versus other currencies following the news from China this week. It hit a two-week high versus the US Dollar while a weakening yen has caused regional equities to enjoy further gains as well.

Sterling had cause for mild celebration this week too, following a welcome dip in unemployment to 7.9% from 8.1% in September and a boost for the retail sector on Thursday. However, it’s probably a bit early start toasting a UK recovery I’m afraid.

The falls in unemployment stand in a very obvious contrast to the poor levels of growth in the UK. It is our belief that UK inflation sits a fair bit above the level of wages at the moment and until pay begins to improve, growth will remain poor as a result.

Jeremy Cook is chief economist at World First foreign exchange.