Tue, Oct 3, 2023
- In line with EIU forecasts, data released by China’s National Bureau of Statistics (NBS) on September 15 suggests that the economy has bottomed out.
- Year-on-year growth accelerated in August in retail sales (4.6%, from 2.5% in July) and industrial value added (IVA; 4.5%, from 3.7%), but in fixed capital formation (FAI ) in January-August (3.2%) slowed slightly from January to July (3.4%).
- The values were in line with our expectations and we stick to our forecast of real GDP growth of 5.2% for 2023. However, increasing signs of structural stress in the economy have dampened our longer-term outlook and we now expect headline growth to be on trend to remain consistently below 5% for the remainder of the 2020s.
Services consumption remains the pillar of China’s consumer recovery. August was the first month for which the NBS released data on services retail sales (which rose 19.4% year-on-year); This new indicator tracks consumer spending in sectors such as education and tourism. The strength of this dynamic was also reflected in service price indices, which helped stabilize headline consumer price inflation (still subdued) at 0.1% in August. A further month-on-month increase in consumer prices – up 0.3%, up slightly from 0.2% in July – supports our belief that consumer confidence is recovering, benefiting consumer-facing industries. We expect this underlying strength to continue through the end of 2023.
Sales of consumer goods showed a significant improvement in August. Annual growth remained stable in categories such as cosmetics (9.7%), communications equipment (8.5%), and gold and jewelry (7.2%), indicating a return of some spending toward durable goods and away from services ( which have thus far dominated the consumer recovery narrative). As the summer holidays end and (domestic) tourism demand slows, we expect this spending “realignment” to gain momentum.
Nevertheless, the magnitude of this transition should not be overstated and we maintain (and underline) our general view that spending on services continues to be the key driver of the overall recovery in consumption in China. The upcoming holidays – including the Mid-Autumn Festival in late September and the Golden Week national holiday from October 1 to 7 – are likely to put tourism volumes on an upward trend. However, the poor employment situation and consumers’ ongoing price sensitivity are likely to continue to curb some tourism spending.
The specter of deflation will remain just that
The weak inflation environment in China, which we expect to continue in the coming months, is emblematic of the country’s uncertain consumer spending outlook. However, our forecasts do not assume that China will slide into deflation. Instead, we assume that the economy has already bottomed out; These factors will help support growth in China’s core inflation (excluding fuel and food prices), although overall price pressures remain generally subdued.
The only exception is pork prices, which rose 11.4% month-on-month in August and remain one of the main drivers of overall inflation. Expected supply hoarding by farmers anticipating higher prices in the coming months (in response to seasonal demand trends) will likely result in hog prices trending higher through year-end. However, pig herd data suggests that pork supply remains plentiful, which should dampen overall prices (particularly given government controls on food prices). In addition to expecting a negative year-over-year increase in oil prices, we expect these factors to keep non-core inflation low.
Factories are coming back into operation
The IVA growth picture suggests that pressure on China’s large industrial companies is easing. The decline in producer prices (-3% year-on-year, from -4.4% in July) is easing, indicating the return of factory-related demand. Importantly, electronics production growth improved significantly in August (to 5.8%, from 0.7% in July), confirming our forecast that the electronics trade cycle will bottom in the fourth quarter of 2023 (the Electronics IVA was up 5.5% in August 2022). , indicating both the absence of favorable base effects and real strength in performance. Automotive value added growth (9.9%) also accelerated from July, partly due to the global expansion of Chinese electric vehicle brands, although a possible EU-China trade dispute overshadows the outlook for this industry.
Nonetheless, we believe that China’s trade situation has bottomed out and that increasing external demand will support IVA growth through the end of 2023. Domestic demand associated with inventory depletion cycles in construction materials and other industrial activities is also expected to help support both industrial IVA and producer price growth through year-end. High frequency data, including blast furnace operating speeds, suggest that some of this momentum is already continuing well into the first two weeks of September.
Property issues remain
The most pessimistic element of China’s economic outlook continues to be the real estate sector. We expect the Chinese real estate market to remain under pressure in the near term as the situation in both home sales and property investment continued to deteriorate in August. The government has rolled out a support package to boost property demand, including through lower down payments and looser mortgage rules. However, we expect these measures to be limited to China’s major cities and will only marginally improve the overall property market outlook.
Nevertheless, these factors could still help boost retail sales of decorative materials and home appliances in the coming months (although this will be a delayed timeline, depending on the stabilization of the real estate market). However, any increase in retail sales through wealth effects will be limited due to long-term structural factors ranging from China’s political direction, which continues to discourage speculative practices, to unfavorable demographic conditions, which will weigh on demand (particularly in smaller cities).
More broadly, the subdued economic outlook and recent credit data suggest that private investment will continue to struggle in the near term. Private sector FAIs contracted 0.7% year-on-year in January-August. Although strong current infrastructure investment, which rose 6.2% over the same eight-month period, has kept overall FAI stable, the difference in these dynamics highlights the uneven trajectory of China’s economic recovery and the limited benefits brought by the current economic situation has offered (mainly non-state) companies. The continued decline in investment – both in real estate and the private sector – underpins our revised forecast for 2024; Given our more pessimistic outlook for the FAI as a whole, we now expect real GDP growth of 4.8% (from 5.1% previously).
The analyzes and forecasts presented in this article can be found in the EIU country analysis service. This integrated solution provides unmatched global insight into the political and economic outlook for nearly 200 countries, enabling companies to identify potential opportunities and potential risks.
Tue, Oct 3, 2023Article tags EconomyChinaAccess to ChinaCountry analysis
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