China: Q1 growth continues to surprise to the upside
April 17, 2017
China expanded at the fastest pace in one-and-a-half years in Q1 as investment and manufacturing propelled economic growth. Analysts, however, are wary about whether this investment-led cycle will be sustainable in the mid-term. GDP grew 6.9% annually in Q1, which was above the 6.8% expansion observed in Q4 and the 6.8% that market analysts had expected.
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, additional data suggest that strong growth in nominal fixed urban investment led Q1’s acceleration. The good news is that the acceleration in investment was mostly due to improved dynamics among private companies rather than among state-owned and state-holding units. Healthy activity in private investment translated into robust industrial production, particularly in manufacturing output, which expanded at the fastest pace in over two years. Private consumption likely weakened at the start of the year as retail sales decelerated from a 10.6% expansion in Q4 to a 10.0% rise in Q1. Q1’s slowdown mostly reflected higher taxes on car sales.
On the external side of the economy, the ongoing pick-up in global demand and a weaker yuan prompted nominal merchandise exports to expand for the first time in two years in Q1, albeit at a relatively mild 8.2% rate. Growth in imports soared to 24.0% in Q1, marking the best result since 2011. Higher commodity prices and stronger domestic demand are behind the astonishing figure. As a result, the trade surplus narrowed to a three-year low, suggesting that the contribution from the external sector may have diminished at the start of the year.
Sequential data show that GDP in Q1 adjusted for seasonal factors increased 1.3%, down from the 1.7% expansion in Q4. Overall nominal GDP grew 11.8% annually in Q1, which was above the 9.6% increase in Q4 mainly as a result of higher industrial prices.
As risks of an abrupt slowdown are gradually fading, authorities have embarked on a modest monetary tightening in order to reduce macroeconomic imbalances, tame capital outflows and encourage much-needed deleveraging. While the People’s Bank of China left the key benchmark rates and the reserve requirement ratios unchanged in Q1, it hiked some money market rates. With the Central Bank in retreat, analysts believe that the government is stimulating the economy via fiscal and quasi-fiscal stimulus measures. In this regard, government spending jumped 21.0% annually in Q1. Going forward, the economy will decelerate slightly on the back of a tighter monetary policy, reduced fiscal support and more moderate dynamics in the real estate sector.