The headlines are true and false. Many say China surprised by recording growth of 4.6% over one year in the third quarter of the year, while market forecasts were around 4.5%, according to data published this Friday by the National Statistics Office (ONE). It is also true that this brings him closer to his goal of closing the year with GDP growth of 5%. But it is also true that these data show the slowest growth in six semesters of the world’s second largest economy.
The outlook shows that the Asian giant is going through its worst economic period, marked by very tepid domestic demand and a real estate sector mired in a deep crisis which is weighing on the country’s economy.
The economists of BloombergChang Shu and Eric Zhu, assured in a note that even if the main figures “are stronger than expected” on GDP growth during the summer months and that activity was stronger in September “they do not does not mean that the Chinese economy is improving.
It is true that the growth of industrial production notably accelerated to 5.4% year-on-year during the month of September, compared to 4.5% in August, which largely exceeded consensus expectations which spoke of an expansion of 4.5%. Retail sales, thanks to the Golden Week holiday, also increased, notably spending on household appliances, whose sales increased by 20.5% year-on-year, compared to 3.4% in August.
What showed some weakness was spending on luxury goods such as jewelry and cosmetics, “which allowed retail sales growth to remain well below the pre-pandemic trend” , according to economists at Bloomberg.
“Gold and jewelry fell 7.8%, cosmetics 4.5% and clothing 0.4%. All remained in contraction year-on-year. Real estate-related categories like furniture (0.4%) and construction materials (-6.6%), continued to decline, showing weakness in the face of difficulties in the real estate market,” Lynn Song, head of the economy at Greater China at ING.
The increase in exports was a positive point during the first eight months of the year, driven mainly by the automobile, semiconductor and electronic devices sector. But shipment growth has slowed against all expectations, at 2.4% over one year in September, a much slower progression than that recorded in April and a drop of 6.3 percentage points compared to the month of August.
It is clear that China is in crisis and is very far from recording double-digit growth as it did a few years ago. But in March, Premier Li Qiang announced that the growth target for 2024 would be “around 5%”, which markets described as “very ambitious”. But Lynn Song said that with the third quarter data, China’s GDP now stood at 4.8% year-on-year in the first half, so it was close to that target.
“The pace of the third quarter numbers keeps China within striking distance of its full-year growth target of around 5% and calls for a slightly less impressive fourth quarter growth rate than expected,” he writes.
Last week, China’s Ministry of Finance announced at a press conference a plan to boost the country’s growth with a package of fiscal measures to help local and regional governments deal with their large debts and thus support land and real estate markets.
Meanwhile, the People’s Bank of China (PBOC) announced a series of stimulus measures on September 24, including reducing the required reserve rate of banks at 50 basis pointsreduce mortgage interest rates and lower down payment rates for second home buyers. In themselves, these are all stimulants to promote consumption and increase the domestic demand of the country, which is on the ground.
These stimulus measures encouraged the market, to the point that Goldman Sachs revised its growth projections upwards by two tenths for this year and the following year. They expect GDP growth of 4.9% – close to the government’s 5% target – compared to their previous October 13 forecast of 4.7%. By 2025, they increased the expansion rate of the Asian giant’s economy from 4.3% to 4.7%.
Looking ahead, the consensus forecast is that fiscal spending will continue to increase. Already at the beginning of the year, the Minister of Finance, Lan Foan, assured in an interview with the People’s Daily that they would increase tax expenditures. In this sense, Chang Shu and Eric Zhu explain that the economy should accelerate, but “only gradually”. They explain that the government will likely invest in more projects to accelerate investments during the rest of the year. “Support for real estate developers from an expanded “white list” can reactivate certain private sector housing projects,” they explain.
But experts warn that as winter approaches, “the window for the construction sector to deliver a significant boost to growth towards the end of the year is narrowing.” On the other hand, they explain that the government places a lot of emphasis on renewal plan of household appliances in homes and factory equipment in businesses, which can encourage consumption and investment, but “the modest scale will limit economic recovery.”
“We estimate that the GDP deflator stood at -0.6% in the third quarter of 2024, a slight increase from -0.7% in the second quarter of 2024, but extending the streak of deflationary figures to a sixth consecutive quarter. With core CPI (0.1% YoY) reaching its lowest level since February 2021, the deflator shows that authorities have a lot of work to do to extinguish deflationary risks.
What is clear is that the Chinese economy could have bottomed out this year and begun its recovery next year, but far from the growth rates before the Covid-19 pandemic, we still have to wait the results of the pandemic. United States elections and the decisions made by the next person in the White House regarding the tariff war.
