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Economic growth slows to at least a 27-year low in Q3 2019

In the third quarter of the year, the Chinese economy expanded at the weakest rate since at least 1992, when the National Bureau of Statistics (NBS) started to publish quarterly data. GDP expanded 6.0% in annual terms in Q3 2019, below both Q2’s 6.2% expansion and the 6.1% increase expected by market analysts. Nevertheless, growth is still within the government’s target of between 6.0% and 6.5% for 2019. Seasonally-adjusted quarter-on-quarter GDP growth inched lower from 1.6% in Q2 to 1.5% in Q3, while nominal GDP slowed to a 7.6% year-on-year increase in Q3 from an 8.3% rise in Q2.

Although the NBS does not provide a breakdown of GDP by expenditure, additional data suggests that the domestic economy is showing signs of strain, with annual growth of industrial production, retail sales and fixed investment all slowing in Q3. Industrial production continued to feel the pinch of waning global demand amid rising trade protectionism. Retail sales moderated, probably reflecting the recent upward trend in inflation following the outbreak of African swine, as well as external headwinds weighing on consumer confidence. Furthermore, manufacturing investment growth over the first three quarters of the year weakened to the lowest level in 15 years, although investment in the tertiary sector stayed resilient.

Externally, the picture remains difficult, reflecting the ongoing trade tensions between China and the United States. Against this backdrop, nominal merchandise exports contracted for the second consecutive quarter in Q3. That said, the contribution from the external sector to overall growth could have been positive given the sharp drop in imports in Q3.

Looking forward, all eyes remain on negotiations between the U.S. and China. Recent talks have indeed yielded a softening in rhetoric: The U.S. held off on another tranche of tariffs scheduled for early October, this time on USD 250 billion of Chinese imports, and the impetus to complete a trade deal at the upcoming Asia-Pacific Economic Cooperation (APEC) meetings in Chile in November seems to have increased significantly. Nevertheless, the likelihood of a conclusive deal still seems highly uncertain.

According to Fotios Raptis, an economist at TD Economics:

“The prospects for a comprehensive deal are slim. Both sides have opposing positions on technology and intellectual property rights. The U.S. is seeking to force China to abide by international standards immediately, while China is seeking a gradual adoption of international standards. In the end, a partial trade deal covering some goods may be the only deal that arises from trade talks this year.”

This view is corroborated by economists at Goldman Sachs, who noted:

“Our baseline expectation remains that the tariffs scheduled for December 15 still take effect, although likely after some additional delay into early 2020. As both countries’ economies feel the impact of the trade conflict, policymakers on both sides could become more motivated to find solutions. […] The upcoming APEC Summit could give Presidents Trump and Xi an opportunity for a ‘narrow deal’ that would slow or perhaps even halt the escalation of tensions, even if fundamental differences remain unresolved.”

FocusEconomics Consensus Forecast panelists expect GDP to expand 5.90% in 2020, which is down 0.1 percentage points from last month’s estimate. In 2021, the panel foresees economic growth of 5.80%.

China - Investment Data

2013  2014  2015  2016  2017  
Investment (annual variation in %)8.1  7.4  7.0  6.8  5.2  

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