Weekly: China’s positive impulse to the global economy
- A steady decline in trend growth rate will likely remain part of the macro picture, however…
- Stimulus efficacy suggests consumer expectation and investor confidence remain constructive
- Consumption, in particular, is amenable to responding to well-targeted measures
- China’s demand may in fact be understated, given data seasonality
- We expect another good GDP outcome in 2Q
We find China’s 1Q GDP data to be in line with recent revival in consumption, loans, and production. Our Nowcast model, which considers high frequency data and calls the GDP of a given quarter long before the actual national accounts release, had steadily perked up in recent months. In late-November, the model was looking at sub-6% growth in 1Q, while by end-March the call had become 6.5%.
What drove this jump? First, a major caveat—China’s first quarter data points tend to be very noisy due to Lunar New Year seasonality and gaps in some releases (sales and production, in particular). Keeping that in mind, our model began to pick up signs of life in long-deteriorating data series like loans, retail sales, and industrial production from February onward. As we stepped into April, we were reasonably confident that a decent GDP release was in the making.
After the release of yesterday’s data, we are beginning to wonder if the 1Q GDP growth number of 6.4% was in fact an understatement. As of now, our Nowcast model is now picking up a sharp rebound in activity going into 2Q.
Breakdown of data indicate that pro-growth policies have begun to through to the real economy. Growth in industrial value-added surged to 8.5% YoY in March from 5.3% in Jan-Feb as factories ramped up output in anticipation of more state-driven businesses. This was evidenced by the surge of fixed asset investment to 6.3% from 6.1% registered in Jan-Feb. Retail sales also expanded 8.7% (Jan-Feb: 8.2%) on the back of a surging equity market.
Looking forward, we expect continued recovery in industrial activities and infrastructure investment. According to Premier Li’s work report, RMB800bn and RMB1.8tn will be invested in railway construction and road construction & waterway projects respectively this year. Other investments include intercity transportation, utilities, civil & general aviation as well as next-generation information infrastructure. Officials have approved a large number of projects since December 2018. And issuance of local government (LG) bond intended to fund infrastructure spending soared in 1Q19 to RMB1.4tn, up significantly from RMB0.2tn in 1Q18. Front-loading of debt allocation alleviates fiscal stress faced by local government. Local land sales, a primary source of LG funding, have come under pressure this year as the property market cools off. A VAT cut of up to Rmb2tn also depresses local tax revenues.
The PMI’s employment component of the non-manufacturing sector – where the bulk of the workforce is employed – remained in the contractionary zone for seven consecutive months. Its manufacturing counterpart also hovered near the lowest level in 7 years. Weak labour market and tepid income growth have dampened consumer sentiment. According to the PBoC’s Urban Depositor Survey, the proportion of respondents who intended to “save more” has, over a quarter, increased by 0.9ppt to 45% in 1Q19. Households were also less optimistic on the outlook for property prices. Home-related expenditure from furniture to electric & video appliances may remain lacklustre. Nonetheless, we estimate that the recent increase in personal income tax threshold and expansion in deductibles should lift households’ income by about 3%. Consumer confidence should also get a lift from the buoyant stock markets.
Exports jumped to five-month high last month, though the scale of the rebound was partly due to the different timing of Lunar New Year and hefty price increases. Specifically, export prices rose 4.4% in 1Q, contributing 66.3% of export growth.
Emerging evidence of stimulus efficacy suggests that consumer expectation and investor confidence remain constructive. Consumption, in particular, is amenable to responding to well-targeted measures, as seen in the recent rebound in loans and retail sales figures. This is a major source of comfort for China’s outlook as growth trends lower. If growth deceleration becomes disorderly, the authorities will have the confidence that they have sufficient tools in their arsenal to stabilise the economy without having to sacrifice corporate deleveraging and associated moral hazard issue.
China’s demand may in fact be understated, given data seasonality issues. Our Nowcast model is now signalling around 7% growth for 2Q, although we assign only modest confidence to that call given how early it is in the quarter. All in all, we expect another good GDP outcome in 2Q, which should offer further crucial support to the global growth picture.
Taimur Baig and Nathan Chow
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