Take Two: China growth accelerates; inflation continues to pressure central banks

What do you need to know?

China’s economy grew faster than expected in the first quarter (Q1), beating forecasts to grow 2.2% on a quarterly basis – faster than last quarter’s (revised) 0.6% expansion and its strongest annual growth in a year. This reflected strong retail sales in March, which were up 10.6% on the year, as well as a 3.9% rise in industrial production after an unexpected jump in March exports. However, persistent concerns over weaker demand are prompting policymakers to consider boosting domestic consumption. China also faces challenges from a shrinking population – the country is expected to be surpassed by India as the world’s most populous nation by mid-year, according to the United Nations.

Around the world

The picture around inflation remained uneven, putting pressure on some central banks to continue increasing interest rates. Eurozone annual inflation was confirmed at 6.9% in March, compared to 8.5% in February. Excluding energy, food, alcohol and tobacco, core inflation was 5.7% versus 5.6% a month earlier. Minutes from the European Central Bank’s March monetary policy meeting showed committee members felt there was “some way to go to bring inflation down”. Meanwhile the Bank of England is expected to raise rates in May after UK headline inflation fell less than expected in March, easing to 10.1% from 10.4% in February, but above a 9.8% consensus forecast. Japanese inflation excluding fresh food and energy rose to 3.8% from 3.5%.

Figure in focus: €43bn

European Union member states and the European Parliament agreed the terms of a €43bn Chips Act designed to increase the region's share of the global semiconductor value chain to 20% by 2030 from 10% currently. The plan initially commits €6.2bn of public funds with the remainder to come from incentives that support further public and private investment. The aim is to channel more funding into advanced manufacturing facilities, research and development, and monitoring potential supply shortages. The Act follows similar initiatives elsewhere but remains dwarfed by the US CHIPS and Science Act which aims to provide about $280bn to boost its domestic industry.

Words of wisdom:

Direct Air Capture: A technique that uses chemical reactions to remove carbon dioxide (CO₂) directly from the atmosphere. The CO2 is then stored underground or used to make products such as concrete or aviation fuel. The US government has offered $3.5bn in grants to companies employing Direct Air Capture (DAC) processes, seeking to fund large-scale facilities that can remove up to a million tonnes of CO₂ each year. DAC is energy-intensive and more expensive than other carbon capture processes – but with further development, could potentially be effective alongside other initiatives in mitigating the effects of climate change.

What’s coming up

Germany’s closely watched Ifo Business Climate index is issued Monday; the barometer rose to 93.3 in March, its highest since February last year, and up from 91.1 in the previous month. On Tuesday, the latest US House Price Index is published, which is followed by Australia’s inflation data on Wednesday. Several Eurozone measures are released on Thursday, including the bloc’s latest Economic, Industrial and Services Sentiment indices. On the same day, an advanced estimate for Q1 US GDP is released – the world’s largest economy expanded by 2.6%, annualised, in Q4 2022. On Friday the Bank of Japan meets to decide on interest rates and a flash estimate for Eurozone Q1 GDP is reported.