China: Economic growth stabilizes in Q1 2019 as policy stimulus kicks in
The Chinese economy continued to show no signs of a slowdown, despite the ongoing trade war with the United States and large domestic vulnerabilities. While growth stabilized in Q1 2019 as a whole, economic data for March suggests that the economy could already have begun to recover. GDP expanded 6.4% in annual terms in Q1 2019, matching Q4’s performance and surpassing the 6.3% expansion market analysts had penciled in. Moreover, Q1’s print was within the government’s target of between 6.0% and 6.5% economic growth for 2019.
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, additional data suggests that private consumption likely gained steam in Q1. Growth in nominal retail sales inched up in Q1 compared to Q4 amid low inflationary pressures and solid gains in disposable income. Moreover, policy stimulus spurred growth in fixed-asset investment. While this is good news for overall economic activity, some alarming signs have emerged. Of particular note, the bulk of the improvement observed in Q1 was carried by state-owned enterprises. This information, coupled with massive increases in credit growth this year, has led to concerns that authorities are overly reliant on old recipes to spur economic activity, which could ultimately backfire by delaying economic reforms and financial deleveraging.
That said, Iris Pang, Greater China economist at ING, highlights the role that 5G likely played in boosting investment growth:
“5G is something we have underestimated. We focused too much on the impact that fiscal stimulus would have on investments and while we understood that 5G is a growth engine, we didn’t realize that it is already in the ground, up and running. This is a unique growth engine for China.”
Meanwhile, external sector dynamics deteriorated with both nominal export and import figures coming in weaker than in Q4 amid the trade spat with the U.S. and soft global demand.
Looking at the breakdown by sector, growth in the secondary sector, which includes manufacturing and construction, accelerated in Q1. Meanwhile, the primary and tertiary sectors both weakened compared to Q4.
Seasonally adjusted quarter-on-quarter GDP growth inched down from 1.5% in Q4 to 1.4% in Q1, while nominal GDP moderated from a 9.2% year-on-year increase in Q4 to a 7.8% rise in Q1. The moderation in nominal GDP reflected the fall in both consumer and producer prices.
March’s economic data has been fairly positive, with retail sales, fixed-asset investment and, especially, industrial production posting solid readings. Some economists consider that it is too early to declare that growth has already bottomed out.
For example, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, state that:
“We believe Beijing might be cautious in interpreting these “strong” headline statistics [and that] a double dip is likely in the near term. Despite the limited room for easing, Beijing might still need to continue its easing stance for a while. We expect Beijing to especially push forward its non-conventional policy easing measures, such as providing special support to the private sector, cutting taxes and deregulating the property markets in big cities.”