The Chinese economy remained hot in early 2011 but monetary trends are signalling an imminent slowdown.  With the “output gap” positive, however, growth must be held below trend for several quarters to relieve inflationary pressures and allow the monetary authorities to ease off on the brakes. Near term, Chinese equities may face the unappealing combination of earnings downgrades with no monetary loosening.

GDP grew by 9.7% in the first quarter from a year before and by 2.1%, or 8.8% annualised, from the fourth quarter of 2010. Domestic demand was up by 10.2% from a year ago but trade subtracted 0.5 percentage points from GDP growth as imports boomed – consistent with the economy "overheating".

The first chart shows six-month growth of industrial output and real money. Recent output buoyancy reflects both stronger global demand and a mini-revival in monetary expansion during the second half of last year. Policy tightening and higher inflation, however, have caused real money trends to weaken in early 2011. With global momentum peaking, the economy could slow sharply over coming months.

Will slower growth bring early inflation relief, heading off further monetary policy tightening? Probably not. The scale of monetary excess over 2008-10 and an associated positive "output gap" – second chart – suggest that inflationary pressures will remain strong for some time after the economy starts to cool. Today's inflation news was poor, with headline and non-food CPI inflation rising to 5.4% and 2.7% respectively in March and the more realistic GDP deflator climbing by an annual 7.6% in the first quarter – third chart.

The Labour Force Survey employment measure reached a new recovery high in the three months to February, reflecting increased employee numbers despite public sector job cuts – see first chart.

The LFS measure could stabilise or fall back slightly near term, based on recent slippage in vacancies – first chart. The Monster index of online job postings, however, suggests that labour demand is holding up – second chart.

Reflecting the employment rise, LFS unemployment fell to 2.48 million, the lowest since September. The more timely claimant-count measure was down further in the latest three months, though was boosted in March by a change in eligibility for single-parent benefits, resulting in an increase in applications for job-seekers' allowance – third chart.

Total hours worked have outpaced employment as the length of the average work-week has recovered. Hours worked correlate with GDP, suggesting that economic recovery remains on track despite recent weather-related volatility – fourth chart.

Judging from media reports, today's data releases represent a triple jackpot for interest rate doves – inflation down, house prices weakening and retail sales slumping. Closer examination, however, suggests otherwise.

The most significant news, arguably, was a further narrowing of the trade deficit in February, reflecting stronger export volumes and a fall in imports – see first chart. Based on the January / February results, trade is on course to boost first-quarter GDP growth by 1.25-1.5 percentage points – further evidence that the economy has bounced back solidly in early 2011 despite high-street weakness (although the Visa Europe expenditure index released last week suggests that consumer spending rose last quarter).

The fall in CPI inflation from 4.4% in February to 4.0% in March was mainly due to a slowdown in food prices and air fares. This effect is likely to prove temporary: it may partly reflect Easter falling later this year than last while food commodity prices and fuel costs have climbed further in recent weeks – second chart.

In addition to the March inflation figures, the Office for National Statistics released an analysis of the impact of the rise in the standard VAT rate from 17.5% to 20%. The increase is estimated to have boosted annual CPI inflation by 0.76 percentage points in January, implying that the headline rate would have been 3.2% rather than 4.0% in its absence. This blows apart the claim that inflation would be close to the target but for the VAT hike, based on the misleading "CPI at constant tax rates" measure, which assumes that tax changes are passed on in full (CPI-CT rose an annual 2.3% in January and 2.4% in March).

The value of retail sales dropped by 1.9% in March from a year before, according to the British Retail Consortium, but weakness largely reflected the Easter effect, a point naturally downplayed by the organisation's propagandists. This is demonstrated by comparing sales with 2009, when Easter Sunday fell on 11 April (4 April in 2010): the average of the current and year-before annual changes was 2.35% in March, within the recent range and well above lows in late 2008 / early 2009 – third chart.

The 1.5% February decline in the Department of Communities and Local Government house price index, meanwhile, was entirely seasonal – the loss represents the smallest February fall since 2007. The more timely Halifax and Nationwide measures suggest that house prices are moving sideways – seasonally-adjusted indices rose by 0.1% and 1.0% respectively between December and March.

Higher undergraduate tuition fees are likely to raise the consumer prices index by about 0.6% over the three years from October 2012, implying a boost of 0.2 percentage points to annual CPI inflation. The CPI rise may inflate public sector net borrowing by about £2.2 billion by 2015-16, mainly reflecting higher inflation-linked benefits. This would wipe out two-fifths of the gain to the public finances from the increased fees.

Based on recent announcements, Research Fortnight is forecasting average headline tuition fees of £8600 in England in 2012-13, or £8200 taking into account waivers. The latter figure represents a 143% increase on the maximum chargeable fee of £3375 in 2011-12.

The CPI weight of undergraduate fees paid by UK and EU students is about 0.45% so a rise of 143% would boost the index by about 0.6% (0.65% to two decimal places).

The fee increase applies to first-year students in 2012-13 and second- and third-year students in 2013-14 and 2014-15 respectively. The CPI effect, therefore, will be staggered over three years, with successive rises of about 0.2% in October 2012, October 2013 and October 2014.

The tuition fee boost to the CPI will have a negative impact on the public finances, mainly by increasing spending on inflation-linked benefits, tax credits and public sector pensions. An estimate of this indexation effect can be derived from Office for Budget Responsibility (OBR) research on the fiscal implications of oil price fluctuations. The OBR has estimated that a permanent £10 per barrel rise in the oil price boosts the CPI by 0.25% while increasing borrowing by £0.9 billion per year by 2015-16 as a result of indexation (see Economic and fiscal outlook, March 2011, p.111). This suggests that a 0.6% rise in the CPI due to higher tuition fees would raise 2015-16 borrowing by £2.2 billion.

The OBR has also estimated that the rise in tuition fees will increase higher education funding by £5.6 billion per year by 2015-16 (see Economic and fiscal outlook, November 2010, p.89). The boost to inflation-linked spending, therefore, could absorb 40% of the additional resources created by the higher fees.

Government plans, in effect, involve transferring £2.2 billion per year by 2015-16 from students to benefit recipients and public sector pensioners, whose incomes are linked to the CPI but who do not pay tuition fees. This makes little sense. Instead, benefits and pensions should be uprated by the CPI excluding tuition fees, with the resources released used to cut borrowing or increase the direct allocation to higher education.

The monetarist rule is that the (real) money supply leads economic activity by between six months and a year. This rule has worked well in recent years: G7 real narrow money contracted in late 2007 before the recession but surged in late 2008 ahead of the economic recovery from spring 2009.

G7 real money expansion fell back temporarily around the end of 2009 but rebounded to a peak last summer. This pick-up has been reflected in a strong global economy in early 2011. Real money, however, has continued to slow in recent months. Based on the monetarist rule, therefore, global growth should lose momentum from the spring.

Other evidence is starting to confirm this scenario. The chart shows the six-month growth rate of combined industrial output in the G7 and emerging "E7" economies together with a forecasting indicator based on the OECD's country leading indices, which incorporate a wide range of economic and financial inputs. The indicator usually leads turning points in output expansion by between three and seven months and has fallen since December, suggesting a growth peak between March and July.

In contrast to late 2007, real money expansion and the leading indicator remain positive – they are not signalling major economic weakness, let alone the dreaded "double dip". Directional changes in the indicator, however, tend to be sustained so a further decline is likely over coming months, in turn implying that the economic slowdown will extend into late 2011.

Importantly, the fall in G7 real money growth has been due to rising inflation rather than a slowdown in nominal monetary expansion. It does not, in other words, reflect any tightening of policy by the G7 central banks. Without policy restraint, inflationary pressures are likely to remain elevated. The outlook, therefore, is for slower economic growth but limited relief on inflation – an unappealing "stagflationary" prospect for markets.