15th April 2015
Craig Botham, emerging markets economist, shares his thoughts on today’s Chinese GDP figures…
Chinese GDP grew 7% year-on-year in the first quarter of 2015, in line with expectations, and slower than the 7.3% recorded in the final quarter of last year. However, nominal growth actually fell below real growth for the first time since 2009, slowing to 5.8% year-on-year from 7.7% previously. So although the consumer price index (CPI) may still be positive, China as a whole looks to be undergoing deflation.
A slower rate of growth was fully expected for the first quarter given the weakness of the property market and reduced fiscal support from local governments. In fact, we had expected a slightly weaker number.
Higher frequency data showed that March did not result in an improvement for China’s economy, with industrial production falling to a 15-year low of 5.6%, and retail sales at a 9-year low of 10.2%. Investment growth came in at a record low as property and manufacturing investment continued to struggle, despite the easing measures undertaken by the central bank in recent months. In part, this may be because, with a GDP deflator of -1.2%, real rates are still climbing despite policy easing measures.
It is an open question whether things will improve meaningfully from here. The first quarter of 2014 was a weak quarter, providing a lower base effect to flatter performance this year. This will be reversed for the second quarter onwards, so a substantial pick-up will be needed if the 7% target is to be reached.
Stimulus efforts so far do not, in our view, constitute a strong enough response to cause a great acceleration in growth. Monetary easing, for example, has not resulted in lower lending rates on new business because banks are trying to maintain net interest margins, while rates on existing lending are still higher in real terms despite nominal cuts, due to disinflation. More easing is therefore needed, and expected, this quarter.