China - Not out of the woods yet, despite sharp Q3 rebound
Real GDP shows a sharp rebound from lockdown slump in Q2, in line with our expectations. September data show this recovery is supply-driven, with 'Zero-Covid' constraining consumption. With headwinds remaining, we cut our growth forecasts for 2022 and 2023 to 3.5% and 5.2%.
On Monday 24 October, China published its Q3 GDP data and September activity data, almost one week later than initially scheduled. Although the publication delay added to market concerns, GDP data came in stronger than expected. Meanwhile, the September activity data make clear that the economic rebound from the slump in Q2 is still driven by the supply side, while headwinds from strict Covid-19 policy, the property downturn and a slowdown in global growth remain. Meanwhile, moves on FX and equity markets suggest investors do not judge the outcome of the CCP summit (also see Spotlight) as particularly market friendly.
Sharp GDP rebound in Q3 does not mean the Chinese economy is out of the woods yet
Real GDP growth accelerated to 3.9% yoy in Q3 (Q2-22: +0.4%), which was better than market expectations (3.3%) but closer to our own forecast of 3.6%. Quarterly growth came in at 3.9% qoq, while the contraction in Q2 was revised slightly, to -2.7% qoq (from -2.6%). The sharp rebound in GDP growth did not come as a surprise to us, as this mainly reflects payback from the slump in Q2 (with its nadir in April), when the Omicron wave caused broad lockdowns including in megacities such as Shanghai, Beijing and Shenzhen. Moreover, the rebound also reflects the impact of support measures in the form of piecemeal monetary easing, targeted fiscal support and a relaxation of macroprudential measures including for real estate. Bloomberg’s monthly GDP estimate rose to 6.1% yoy, the highest reading since February. Meanwhile, despite the better than expected Q3 GDP numbers, the CNY (versus USD) and the Chinese stock market traded lower initially, suggesting that financial markets do not judge the outcome of the CCP summit as very market friendly. As we do not expect a quick turnaround in Covid-19 policy following the summit, and with the property sector still in the doldrums and global growth coming down sharply, we have lowered our growth forecasts for 2022 (to 3.5%, from 3.7%) and 2023 (to 5.2% from, 5.6%).
September data show rebound is driven by supply side, as ‘Zero-Covid’ keeps constraining consumption
The September activity data once more illustrates that the Q3 rebound from the Q2 slump is driven by the supply side, as Beijing prioritised normalising production and transport over supporting consumption. Industrial production came in much stronger than market expectations, at 6.3% yoy (August: 4.2%, consensus: 4.8%). Fixed investment growth accelerated slightly, to 5.9% yoy ytd (Jan-August: 5.8%, consensus: 6.0%). This acceleration was driven by infrastructure investment, while the property investment slump deepened even further. Retail sales growth slowed significantly compared to last month and came in weaker than expected, at 2.5% yoy (August: 5.4%, consensus: 3.0%), with residential property sales still down almost 30% yoy. All this confirms that pandemic flare-ups and strict Covid-19 policy continue to leave their mark on consumption. While foreign trade data point to a further slowing of export growth in line with the cooling of global demand, import growth is even weaker reflecting the state of domestic demand. Meanwhile, the unemployment rate picked up again, to 5.5% (August: 5.3%, consensus: 5.2%), with youth unemployment still at a very high 17.9%.