Is stimulus working too well?
Last week China reported that GDP accelerated in 2Q by a year-over-year rate of 7.9%, up from 6.1% y/y in 1Q.
I spotted an interesting article about China's recovery in the latest Economist that highlighted how strong China’s economy may be and the economic stimulus implemented by the government may be too much of a good thing.
The Economist noted that GDP grew at an annualized rate of 16.5% in the quarter just ended, according to Goldman Sachs, making it the economic envy of the world.
Note that U.S. GDP is reported on an annualized basis by taking actual growth in a quarter and roughly multiplying by 4. Year-over–year growth looks at where the economy is at the end of the quarter and simply calculates the percentage increase or decrease versus the prior year.
Source: The Economist
If Goldman Sachs is anywhere near correct (and they probably are in the ballpark). China’s stimulus plan is providing needed support at a time when exports are suffering from a deep global recession (Please take note: fiscal stimulus works best when funds are quickly spent on projects that have high economic returns, not high political returns).
But the Economist also said that the government has removed many of the restrictions on lending that had been designed to prevent overheating in the economy as well as cap rising inflation.
Inflation is nonexistent right now in the Asian powerhouse, but worries are beginning anew that runaway growth could fuel new bubbles.
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