China Private Consumption (ann. var. %)

Private Consumption in China

Economic growth records quickest upturn since Q1 2022 in Q1

GDP growth improved to 4.5% year on year in the first quarter, from 2.9% in the fourth quarter of last year. Q1’s reading marked the fastest expansion since Q1 2022, and was above market expectations. The removal of Covid-19 restrictions, the subsidence of the pandemic, and the rollback of some property restrictions likely all aided momentum in the quarter.

The services sector grew 5.4% annually in the first quarter, picking up from the fourth quarter’s 2.3% increase and marking the best reading since Q3 2021. Private spending appeared to benefit from improving consumer sentiment and lower unemployment following the economic reopening. Meanwhile, the industrial sector lost steam, growing 3.3% in Q1 (Q4: +3.4% yoy). Soft external goods demand partly offset the beneficial effects of the normalization of supply chains. Agricultural sector growth slowed to 3.7% in Q1, from 4.0% logged in the prior quarter.

On a seasonally-adjusted quarter-on-quarter basis, economic growth picked up to 2.2% in Q1, following the previous quarter’s 0.6% growth.

Looking at data for March, the 10.6% expansion in retail sales was stronger than predicted, while industrial production undershot market expectations with 3.9% growth. Cumulatively in the year to March, fixed investment growth also undershot expectations, weighed down by stagnant private investment. Turning to Q2, year-on-year growth will pick up thanks to a more favorable base effect, although economic momentum will likely ease somewhat in sequential terms as pent-up demand eases. For 2023 as a whole, the economy appears on track to comfortably meet the government’s cautious target of around 5% GDP growth.

Commenting on the Q1 reading, Nomura analysts said:

“Despite the stronger-than-expected GDP growth reading, we see some weakness and inconsistency in the data. First, growth of delivered value for exports in RMB terms worsened to -5.4% y-o-y in March from -4.9% in January-February, in contrast to the jump in export growth in RMB terms […]. Second, despite a low base, new home sales (by floor space) growth of 0.1% y-o-y in March i?s up only slightly from -3.6% in January and February and is far below the 45.0% y-o-y reading from the 30-city survey. […] Third, despite the decline in the headline unemployment rate […] the unemployment rate in the young age group rose further […] reaching its highest level since the summer of last year.”

On the outlook, United Overseas Bank’s Ho Woei Chen said:

“Taking into consideration of the latest data and factoring in further stabilisation in the property market, we think China’s full-year 2023 GDP growth could now potentially come in at a faster pace of 5.6% (previous forecast: 5.2%) compared to the official target of 5.0%. Looking ahead, the 2Q23 GDP will be boosted by a low base while an expected upturn in global electronics demand in the later part of the year could provide added upside to the recovery in the second half of the year.”