China: GDP improves in the first quarter, although underlying conditions are grim
GDP growth gained pace to 4.8% year on year in the first quarter, from 4.0% in the fourth quarter of last year. The reading was higher than market expectations and driven by stronger growth in the industrial sector, which more than offset weaker growth in services and agriculture. The front-loading of infrastructure spending at the central government’s behest was likely a factor behind the surprisingly solid Q1 GDP figure. Breaking the quarter down, activity performed stronger than expected in January and February, before significant deteriorations in key indicators such as the PMI readings, retail sales, industrial output, investment and housing sector data in March as Covid-19 disruptions intensified.
That said, the GDP reading could still overstate the true strength of the economy, given discrepancies between the strong headline indicators in January–February and other high-frequency data. On a seasonally-adjusted quarter-on-quarter basis, economic growth edged down to 1.3% in Q1, from Q4’s 1.5% increase.
Looking ahead, GDP growth is expected to be downbeat in Q2, as lockdowns in Shanghai and a host of other Chinese cities are expected to weigh heavily on private consumption, industrial output and economic sentiment, and disrupt exports. While Beijing is aiming to ramp up fiscal stimulus, Covid-19 lockdowns and local governments’ fiscal shortfalls due to slumping land revenues could constrain extra infrastructure spending. Moreover, monetary support has so far been lackluster, with the PBOC unexpectedly keeping its policy rates unchanged in mid-April.
On the outlook, Ho Woei Chen, economist at United Overseas Bank, commented:
“We think that the economic challenges remain daunting as the prolonged Covid-19 curbs could exert a greater downward pressure in Q2 2022 as more cities are affected. The impact of the domestic lockdowns and the Russia-Ukraine conflict is still uncertain at this point while the real estate market outlook has remained weak. As such, we maintain our 2022 GDP growth forecast for China at 4.9%.”
Analysts at Goldman Sachs were more downbeat:
“Given the highly transmissible Omicron variant and stringent zero-Covid policy, we continue to believe it may take a longer time and more efforts to contain the ongoing wave—it is clear that the negative Covid impact will extend to April and possibly beyond, leading to a weak start to Q2. We maintain our below-consensus full-year GDP growth forecast of 4.5%.”