China: Economy speeds up in Q3 but remains subdued
October 25, 2022
GDP growth gained steam to 3.9% year on year in the third quarter, which was up from 0.4% in the second quarter and above market expectations. Covid-19-related disruptions eased in Q3, allowing for accelerations in services and industrial activity, although growth in both sectors was suppressed relative to pre-pandemic levels.
The services sector grew 3.2% annually in the third quarter, contrasting the second quarter's 0.4% decrease. In addition, the industrial sector gained steam, growing 5.2% in Q3 (Q2: +0.9% yoy). Agricultural sector growth fell to an over two-year low of 3.4% in the third quarter (Q2: +4.4% yoy). Looking at narrower subsectors, construction expanded by close to 8% due to the government’s infrastructure stimulus, while the real estate sector was down over 4% amid the ongoing property crisis.
On a seasonally-adjusted quarter-on-quarter basis, economic activity bounced back, increasing 3.9% in Q3, contrasting the previous quarter's 2.7% contraction. Q3's reading marked the best result since Q2 2020.
Looking at September figures, data suggests an uneven end to the quarter. On one hand, industrial production and fixed asset investment growth accelerated. On the other, retail sales growth slowed and undershot market expectations. Moreover, home prices were down 1.5% year on year—the fifth consecutive month of contraction—while new home starts fell over 40%.
On the Q4 outlook, analysts at Goldman Sachs said:
“High-frequency data including emerging industries PMI (EPMI), new home sales, auto sales, transportation and long holiday tourism revenue pointed to a likely weak start in Q4. We revise down our Q4 sequential growth forecast to 3.5% qoq annualized from 5.0% previously.”
On the November announcement that the authorities would implement a 16-point plan to reboot the property sector, including through providing extra financial support to both developers and home buyers, Nomura analysts said:
“Those cash-strapped developers (especially private ones), construction companies, mortgage borrowers and other related stakeholders can now breathe a sigh of relief. However, it could take a few more months for the property sector to recover due to the pandemic and Beijing’s reluctance to deregulate the sector and stimulate home demand in large cities. Even after a recovery, new home sales could settle on a level significantly lower than prior to the pandemic.”
Author: Oliver Reynolds, Economist