China: Economic growth stabilizes in Q4 2019
In the fourth quarter of 2019, economic growth remained weak by historical standards but managed to break a downward trend in place since Q3 2018. GDP expanded 6.0% in annual terms in Q4 2019, matching both Q3’s expansion and the result expected by market analysts. Seasonally-adjusted quarter-on-quarter GDP growth inched up from Q3’s 1.4% to 1.5% in Q4 and nominal GDP accelerated to 9.6% year-on-year in Q4 after rising 7.6% in Q3. Meanwhile, looking at the year as a whole, the economy grew 6.1%, marking the weakest expansion in 29 years but still within the government’s target of between 6.0% and 6.5% nonetheless.
Although the NBS does not provide a breakdown of GDP by expenditure, additional data suggests that manufacturing activities picked up in the quarter, likely reflecting hopes of an end to trade hostilities between China and the United States. This could be partially corroborated by a rebound in merchandise imports, potentially reflecting manufacturers gradually restocking their inventories. That said, the strong reading was also the result of higher oil prices. Although merchandise exports also rebounded in Q4, the improvement was more limited compared to the import figures, suggesting that the contribution from the external sector to overall growth could have deteriorated in the period.
Despite a slight acceleration in nominal retail sales growth in Q4, private consumption likely moderated in real terms in Q4 owing to a sharp rise in inflation due to the impact of African swine on meat prices. Meanwhile, nominal fixed investment likely improved in Q4 on solid manufacturing investment. That said, infrastructure and property likely dragged on overall investment.
Looking forward, the trade relationship with the U.S. will continue to dominate developments in China despite the recent agreement. Moreover, growth should continue to decelerate due to domestic economic vulnerabilities, lack of fiscal and monetary policy space and low incentives to jumpstart economic growth using old recipes which could exacerbate domestic imbalances. Supporting this viewpoint, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, noted:
“We believe the current downcycle is not yet over, as we anticipate strong growth headwinds from weakening growth of new home sales and property construction investment, a likely credit crunch in some low-tier cities, contracting local government revenues from land sales, still-elevated uncertainty related to US-China trade relations, and the recent outbreak of “Wuhan pneumonia”. However, Beijing’s has much less policy space than in previous easing cycles, owing mainly to rising debt, falling returns on capital and a narrowing current account surplus.”