Bad news is good news as Chinese data slumps
Chinese GDP for Q1 was even worse than expected, and we have substantially cut our forecast for the year. However, the data gives two reasons for optimism.
Authors
This quarter’s GDP figure was a big test of the reliability of Chinese economic data. The country’s monthly data for January and February was abysmal, and anything better than a matching GDP print for the quarter would have been met by a certain amount of sceptical jeering.
Our own in-house model, for example, suggested that on the basis of the first two months of the quarter alone, a contraction in China’s economy of around 3.5% year-on-year (y/y) seemed warranted, with even this number constrained by the historical tendency of Chinese GDP towards stability.
This forecast left open the possibility of a sharp improvement in March. However, with some quarantine restrictions remaining in place for that month, an immediate recovery seemed highly unlikely.
In the end, the data release was worse even than our model had suggested. Never, though, has the adage applied so often to Chinese data been truer: “bad news is good news”.
There are two reasons for this. The first is that it represents a move towards accepting reality. We have some hope now that Chinese economic data will be more accurate in the future.
The second reason is that, given the government has only recently reiterated its commitment to growth targets, the poor data implies that strong stimulus should be on its way.
It is difficult to see how the target for doubling incomes from their 2010 levels could be met this year, given that full year growth of around 5.6% would be needed, but any attempt to come close will require outsized expenditures.
Higher frequency data meanwhile showed some improvement in March as restrictions were eased.
Industrial production saw a particularly sharp upward trajectory, recording a y/y contraction of only a little more than 1% y/y after a 13.5% decline in the first two months of the year. This suggests there may still be some issues with Chinese economic data, though we think it is also possible industrial production worsens again, along with exports, next month.
Exports also saw a big improvement in March as the backlog of orders from February was cleared, but with the rest of the world now shut down, China’s ports and factories may find it difficult to sustain this momentum.
The smallest improvement in the usual monthly series was in retail sales. In real terms, these contracted 20%, better than the 25.7% contraction previously but clearly still struggling. Anecdotal reports suggest shoppers remain nervous, and we think this is a matter harder to resolve with stimulus cheques. Fixed asset investment, however, still down around 15%, will be easier to revive as soon as workers are released from quarantine. The surge in credit in March paints a very supportive picture on this front.
Where does this leave our full year forecast? So far we have maintained two forecasts for China; one for the official numbers and another for our own indicator, which we regard as being a closer measure of reality. Tentatively, we think we may now be able to align the two.
Certainly, our previous official forecast of 5% for 2020 looks hopelessly optimistic. Our activity indicator now points us more towards full year growth of a little over 2%, a downgrade from the previous estimate of 3.5% and in normal times an embarrassingly large revision. It is a mark of the uncertainty of the times that this now seems almost unremarkable.
Important Information:
This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). It is intended solely for wholesale clients (as defined under the Corporations Act 2001 (Cth)) and is not suitable for distribution to retail clients. This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group. The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document. Opinions, estimates and projections contained in this document reflect the opinions of the authors as at the date of this document and are subject to change without notice. “Forward-looking” information, such as forecasts or projections, are not guarantees of any future performance and there is no assurance that any forecast or projection will be realised. Past performance is not a reliable indicator of future performance. All references to securities, sectors, regions and/or countries are made for illustrative purposes only and are not to be construed as recommendations to buy, sell or hold. Telephone calls and other electronic communications with Schroders representatives may be recorded.
Authors
Topics