Normally, I write a summary of the week’s major economic events on a Sunday morning. This week I am going to leave the heart-rending events in Japan to be covered by the news teams, and instead focus on two other developments which have important ramifications for the global economy – the slowdown in China, which is becoming increasingly accepted by a previously sceptical economics profession; and the moderately promising deal on sovereign debt which was announced by EU leaders in the early hours of Saturday morning.
1. China definitely seems to be slowing.
In recent months, many China watchers have been slow to acknowledge the extent to which the economy has slowed down.
As the first graph shows, monetary growth has in fact been slowing since the early part of 2010, and we will get more evidence on this when the money supply data for February are released next week. 
The authorities now seem clearly to have decided that macro-policy settings were too loose during 2009. For example, at last week’s National People’s Congress, Premier Wen placed the control of inflation at the top of the political agenda, and seemed clearly to accept that this would involve a period of significantly slower growth in real GDP.
In fact, on the growth front, there is increasing emphasis being placed on the sustainability of growth, and on its fairness, rather than on maximising the pace of expansion. This approach has been visible for quite a while now, but it was temporarily suspended in 2009, when the emphasis was placed on avoiding a recession. Now it is back.
The official GDP data showed no sign of any slow-down in the course of last year, but more recently the key business survey readings have definitely shifted downwards, in marked contrast to the surge in strength elsewhere in the world.
I would place less emphasis on these readings than I would in Europe and (especially) in the US, because the business surveys in China have a much shorter history. The seasonal patterns are therefore much less reliable, and the relationships with official economic series (such as GDP) are much less well established. Nevertheless, the drop in PMI figures shown in the second graph is certainly hard to ignore.
These readings seem consistent with GDP growth of around 8 per cent, compared to the 12 per cent seen in some recent quarters.
The industrial production and retail sales numbers for February, published last week, were also weaker than expected, though it is hard to say how much these figures were affected by the Chinese New Year. 
The March data will be unusually significant this year, since they will tell us whether the recent slowdown is progressing even faster than the authorities would like. However, my indicator of industrial overheating (which I first discussed here) continues to suggest that underlying inflation pressures should be gradually coming under control. The inflation data for February partially confirmed this. Although the headline rate remained unchanged at 4.9 per cent, this was mainly due to a further rise in food prices. The non food component of inflation dropped slightly last month, as would expected from the slowing economy which is depicted in the graphs.
All this suggests to me that the authorities may be further advanced in the control of general overheating than seemed likely a few months back. Of course, there are still many imbalances in the economy which will take years to address, but at least the threat of 2007-style overheating seems to be receding. It is interesting that Chinese equities no longer seem to be under-performing global markets, which implies that they agree with this assessment.
2. The EU Summit could have been worse.
The results of the last week’s EU summit meeting were better than I had expected, in the sense that the broad outlines of the package which will emerge on 24/24th March clearly began to appear, at least in outline form. The increase in the scale of lending which the EFSF/ESM will be able to undertake was expected, and is an important step forward. Furthermore, the reduction of 100 basis points in the rate charged on lending to Greece, along with an extension in the terms of the debt, represents a moderate degree of fiscal transfer from the strong to the weak economies. Ireland has not yet come into line with Greece by accepting an increase in its corporation tax rates, but it will surely have to do so eventually.
More worrying is the fact that the ECB’s wishes have been largely snubbed by the heads of government. The central bank wanted the fiscal authorities to assume responsibility for purchasing secondary market public debt, and even for emergency loans to the banking sectors of troubled economies. They were also asking for a “quantum leap” in the direction of common control and monitoring of national budgetary policies. Although there have been the usual vague noises in the latter direction, the overall package does not seem to have given President Trichet much of what he wanted.
The final deal in two weeks time may be enough to placate the bond markets for a while, but will it prove enough to withstand the forthcoming tightening of monetary policy by the ECB? That will be the next problem.
