Below trend growth to continue
According to National Accounts data released today, the Chinese economy grew 1.7% in the June quarter to be 7.5% larger than the same period last year. This result is in line with our forecast for the quarter, a solid outcome relative to the recent spate of soft partial indicators.
According to National Accounts data released today, the Chinese economy grew 1.7% in the June quarter to be 7.5% larger than the same period last year. This result is in line with our forecast for the quarter, but is a solid outcome relative to the recent spate of soft partial indicators nonetheless. In contrast to rebalancing objectives, official data show that growth over the year in H1 2013 was driven by investment (contributing 4.1ppts to growth), followed by consumption (3.4 ppts). Net exports made a negligible contribution. Revised q-o-q growth rates suggest the economy’s growth momentum has stabilised at a slower pace than we saw towards the end of 2012. While some of the slowing has been an intentional attempt by authorities to achieve more sustainable (and balanced) growth, maintaining this pace of growth (6.8% saar) for H2 2013 would see annual growth dip below the government’s target of 7.5%.
While this could suggest some downside risk to our outlook, we are maintaining our forecast (for now) of 7.5% growth for 2013. Regarding the policy outlook, the relatively hardline stance taken by policymakers in the past month suggests that they may keep monetary conditions tighter for a little while longer – indicating that there will be no cuts to interest rates. The liquidity squeeze that created market jitters during June has largely subsided, although conditions remain tighter than they were earlier in the year. Nevertheless, with inflation pressures remaining under control we can not rule out the possibility of policy stimulus measures to help achieve the growth target for the year. This could potentially include cuts to bank’s reserve requirements, although this is not provided for in our forecast.
Partial economic indicators show that weak overseas demand has weighed on China’s manufacturing sector, although domestic demand has also been softer, due in part to the government’s rebalancing efforts – including a tighter stance on credit policies. Although the deceleration appears to be occurring at a gradual pace – once we account for the impact of policy changes – hope of a meaningful acceleration in activity during H2 2013 is looking increasingly unlikely. Business surveys show that conditions facing Chinese firms remain challenging, while signs of improvement in the important real estate sector appear to be losing traction as credit conditions tighten and authorities work to rein in the sector. However, it is the conditions facing retail and wholesale business that is particularly concerning since much of the rebalancing needed in the economy – a major focus of the Chinese leadership – will rely on much stronger household consumption. Further to this, growth in real urban household’s disposable income has undershot GDP in H1 2013 (6.5%), although income growth for rural households was somewhat better (9.2%).
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