China’s consumers spark surprise boost for struggling economy

The third quarter national accounts published earlier today show that China’s economy performed better than expected.

According to the official data, output expanded by a seasonally-adjusted 1.3% quarter on quarter (q/q), up from a downwardly revised 0.5% q/q increase in Q2. Base effects meant that the annual rate of GDP growth still slowed, but at 4.9% it beat the consensus forecast of 4.4% and was ahead of our baseline forecast.

We do not yet have the full breakdown of growth but the monthly activity data, which were also published today for September, show that much of the improvement came from consumption. The annual rate of retail sales growth accelerated through the third quarter, perhaps buoyed by looser policy, alongside a steady decline in the official unemployment rate that fell to 5% in September. By contrast, investment has lagged behind. While capital spending in the manufacturing sector has picked up in the past couple of months, investment in both infrastructure and the beleaguered housing sector have struggled.

As we previously argued, the domestic picture remains challenging. Policy has become more supportive and rumours continue to swirl about additional fiscal stimulus and macroeconomic reforms. Nonetheless, private sector demand for credit remains soft in an environment where a broad housing recovery is unlikely and corporates are either unable or reluctant to borrow. Meanwhile, in the absence of any meaningful intervention, high levels of indebtedness leave local governments less able to deliver economic stimulus through measures such as infrastructure projects.

However, it is not all bad news and the early signs of an upturn in the global goods cycle that we discussed earlier this year appear to be playing out in recent economic data.

Industrial production growth of 4.5% year-on-year (y/y) last month was a touch better than expected. Meanwhile, September export data from China, South Korea and Taiwan were all better than forecast. And while noisy, once adjusted for working days, South Korea’s exports in the first ten days of October are consistent with a further improvement in the region’s trade dynamics this month.

Leading indicators point to a further improvement in China’s exports

The better-than-expected third quarter data suggest China is back on track to reach its 5% growth target this year.

An upturn in manufactured exports is unlikely to entirely fill the void left by weaker housing, but it would at least offer some positive dynamic to China’s economy that does not appear to be fully priced into markets.