China rebounds, but domestic demand boost needed

China’s economy rebounded strongly in the third quarter to recover all of output lost during Covid-19 lockdowns earlier this year.

Output expanded by a seasonally-adjusted 3.9% in the three months to 30 September, meaning that the annual rate of GDP growth accelerated from 0.4% in the second quarter to 3.9% in the third quarter. The result was better than had been expected by analysts.

The consensus forecast was for growth of 3.5% q/q and 3.4% y/y respectively. And if anything, a soft set of September PMIs, coupled with the unusual delay of the national accounts during the week of the ruling Chinese Communist Party’s Congress, had raised suspicions that growth would be weaker than generally expected.

September activity data, which were published alongside the full third quarter national accounts, showed that industrial production unexpectedly accelerated last month on the back of better-than-expected export data. Growth in industrial production picked up to 6.3% y/y, from 4.2% y/y in August.

However, it seems unlikely that the economy can continue to rely on this driver of growth for much longer. After all, surveyed new export orders have resumed their downward trend and global demand for manufactured goods is likely to weaken significantly in the months ahead as high inflation and rising interest rates choke off demand.

Accordingly, the onus is now on domestic demand to drive future growth. We have been arguing for some time that the domestic economy will start to benefit from a cyclical improvement from late-Q3 onwards. It is also promising that recent data have brought tentative signs of stabilisation in the real estate sector after additional targeted policy.

However, the Party Congress did not reveal any major additional support for housing, or indeed the broader economy. And with consumers still hesitant in the face of possible lockdowns to control outbreaks of Covid-19 we continue to expect a fairly shallow recovery. Our forecast is for GDP growth of 3.3% this year with a pickup to 5% in 2023.