China Data Disappoints and Trimming Growth Momentum

Figure 1: Industrial Production Yr/Yr (%)

Source: Datastream/Continuum Economics 

The April economic data from China makes somewhat disappointing reading.  The bright spot remains retail sales that were up 18.4% Yr/Yr due to the low base last year with the Shanghai lockdown. Restaurant were up 44% Yr/Yr, while Auto sales stood 38% higher. Reports of healthy travel levels in the early May holiday period suggest that momentum is being maintained for consumer services as pent up demand is sustained.   

However, the output side of the economy is lagging, with April Industrial production at 5.6% Yr/Yr well below expectations and fixed asset investment YTD only 4.7% Yr/Yr.  One reason is the slowdown in the world economy, which has dented export growth – this has been evident separately in the trade data.  Secondly, consumption was more depressed than output during 2021-22 zero COVID phase, as the authorities tried to sustain output more than consumption.  This means output is getting less of a bounce from the endemic COVID policy. The third reason is that the residential property sector recovery is only modest rather than substantive, as confidence has not fully recovered with the three red lines policy for property developers remaining in place.  Though property sales have started to bounce, residential property construction was still weak in April.  This is having an impact across industrial production, with restrained steel output hurting iron ore prices this month.   

This two tier economic growth is not a threat to achieving 5% growth in 2023, with enough momentum to help achieve this goal and policy stimulus still feeding through.  In the wake of recent data, speculation has restarted about a 10bps cut in loan prime rate or a further 25bps cut in the RRR rate.  We would suspect that the PBOC will be more focused on sustain a good quantity of money in the wake of the April slowdown in total social financing growth, but it is possible that this could be supplemented with additional policy action.  Monday’s quarterly PBOC monetary report also signalled a more dovish tilt, with an objective of supporting the economy with appropriate policies. 

What recent numbers do suggest is that the 2nd phase of the recovery does require extra help from employment growth and then income and consumption growth.  This still remains our central view, but we are less confident about this being sustained all the way through H2 2023 and H1 2024.  The export outlook for China will not really recovery until 2024, with lagged monetary policy still feeding through to hit growth in key export markets in the U.S. and Europe.  Thus we are revising down Q2 GDP Yr/Yr from 8.0% to 7.0% and 2023 GDP from 5.8% to 5.5%.  More importantly, we are concerned that momentum will not now carry through to H1 2024 and thus we are cutting the 2024 growth forecast from 5.5% to 4.9%.