China: GDP records slowest increase since Q3 2020 in the third quarter
October 18, 2021
GDP growth slowed markedly to 4.9% year-on-year in the third quarter, from 7.9% in the second quarter. Q3's reading marked the slowest growth since Q3 2020. On a seasonally-adjusted quarter-on-quarter basis, economic growth slowed markedly to 0.2% in Q3, following the previous period's 1.2% expansion.
Looking at the breakdown, the services sector grew 5.4% in Q3 (Q2: +8.3% yoy). Momentum was likely curtailed by Covid-19 flare-ups in July–August that weighed on consumer confidence and mobility. Meanwhile, the industrial sector was up only 3.6% (Q2: +7.5% yoy), hampered by an ailing construction sector due to the government’s property curbs. Moreover, power shortages caused some factories to temporarily close, hitting manufacturing. Power shortages were a result of limited coal supply and local governments rushing to meet Beijing’s strict emissions standards. Global supply constraints likely also played a role in dampening industrial output. Meanwhile, the agricultural sector expanded 7.1% in annual terms (Q2: +7.6% yoy).
Looking ahead, GDP growth is expected to slow even further in Q4. Power constraints will likely limit industrial output early in the period, although recent reforms to coal pricing should boost supply of the commodity and aid electricity availability further ahead. Moreover, the government’s clampdown on the property sector, the fallout from the Evergrande crisis and broader regulatory uncertainty could also weigh on momentum. That said, there is disagreement among panelists over the extent of the slowdown.
Analysts at Nomura are bearish:
“We expect year-on-year GDP growth to decelerate further towards 3.0% in Q4 and could remain low in spring 2022, as Beijing sticks to its zero-Covid strategy, property curbs and restrictions on energy consumption. Export growth could naturally drop on a higher base and a shift to a 'living with Covid strategy' by most other countries, while surging PPI inflation could reduce real demand.”
However, Iris Pang, chief Greater China economist at ING, is more upbeat:
“We are revising our China GDP growth forecast down to 4.3% year-on-year for the fourth quarter of this year from 4.5% year-on-year, after the release of this latest data, although our full-year GDP forecast stays at 8.9%. This is based on the expectation that there will be a 0.5 percentage point broad-based RRR (required reserve ratio) cut in Q4 2021 to support growth by ensuring enough liquidity to avoid any spikes in interest rates.”
Author: Oliver Reynolds, Economist