No immediate relief in sight for China’s slowing economy

  • GDP growth in China slowed to 6.4% in Q4 2018
  • The slowdown was in line with expectations but is likely to emphasise ongoing concerns
  • Activity may weaken further in Q1, before government action works to stabilise the economy later in the year.   

Chinese real GDP growth slowed to 6.4% year-on-year (YoY) in Q4, from 6.5% in the previous quarter. Although largely in line with expectations, the slowest growth since the years of the financial crisis will only emphasise the building concerns around China’s economy, and market hopes for more dramatic stimulus.

Despite the headlines we do not think the slower growth in 2018 had much to do with the trade wars. Growth in China was slowing well ahead of tariff implementation, particularly if one looks at higher frequency data rather than the official GDP growth rate. Momentum seemed to peak in April and the higher frequency data marked a sharp decline from that inflection point.

Also of concern, alongside the weaker trend for monthly data, is that the implied nominal GDP growth fell sharply to 8.1% YoY in Q4 from 9.6% in Q3. Weaker nominal growth creates headwinds for earnings and for markets as a result.

As to what lies ahead, we do not believe that stimulus measures deployed so far will prove sufficient to turn the economy around. In general, the Chinese leadership seem much more cautious in this downturn than in 2015 or 2009. To an extent we think this reflects real constraints on policymakers, in the form of concerns over what excessive liquidity could do to the currency and financial system, and the level of debt held by local governments.

Consequently, we see the potential for further weakening of growth in the first quarter of 2019 before government action works to stabilise the economy in the second or third quarter. A trade truce could help matters, but will not be sufficient to reverse China’s longer term slowdown.