China Nominal Fixed Investment (ann. var. %)

Economic growth slows in Q4

GDP growth waned to 2.9% year on year in the fourth quarter from 3.9% in the third quarter, broadly in line with our panelists’ expectations.

The services sector grew 2.3% annually in the fourth quarter, decelerating from the third quarter’s 3.2% increase. In addition, the industrial sector lost steam, growing 3.4% in Q4 (Q3: +5.2% yoy). Both the services and industrial sectors were weighed on by tightening restrictions in October and November—lockdowns reportedly affected areas worth a quarter of China’s GDP by end-November. The sudden shift to living with Covid-19 then led to an explosion of virus cases which disrupted activity in December. That said, the economy held up better than forecast at the end of the quarter: Industrial production rose 1.3%, retail sales declined 1.8%, and fixed investment increased 5.1% in December in annual terms, beating market expectations. Finally, agricultural sector growth picked up to 4.0% in Q4, from the 3.4% expansion in the prior quarter.

On a seasonally adjusted quarter-on-quarter basis, economic activity was flat in Q4 compared to Q3, down from the previous period’s 3.9% expansion.

Looking forward, the Consensus is for year-on-year GDP growth to be downbeat in Q1 as external demand ebbs and the pandemic dampens activity at the outset of the quarter. Moreover, vehicle sales will likely decline following the expiration of a vehicle tax cut in December. That said, with Covid-19 cases peaking in late December and early January, a meaningful pick-up in momentum is likely after the Lunar New Year festivities.

On the outlook, Nomura analysts said:

“We still caution that the pace of the recovery should not be overstated, in view of likely modest pent-up demand, a deteriorating export sector, long-term issues in the property sector and payback effects from auto stimulus.”