Article 2 October 11, 2021

Nowcasting China’s GDP: Expect a rapid deceleration to 4.9% in Q3

October 8, 2021

Growth rate decelerating
After reaching a peak in Q1 2021, China’s growth rate slowed down in the following months. The trend was not unexpected, as the momentum from the post-Covid recovery subsides cyclically after a strong growth for almost a year. This is why our forecast for China’s GDP growth was set very conservatively at the beginning of 2021 (7.8% for 2021) compared with the market consensus. Still, the market sentiment was less prepared for the inverse U-shaped trajectory in growth, especially after a series of negative events, including the Covid-19 outbreak in summer, the regulatory crackdown, the Evergrande crisis and the recent power crunch. All the above points to a more rapid slowdown in Q3 2021.

Break down of GDP expenditure
To quantitatively predict the economic performance during Q3, we break down our analysis by GDP expenditure. Among them, the first and foremost factor is consumption, which has contributed the most to China’s GDP in the past two quarters. The monthly reported retail sales, which includes most of China’s goods and restaurant consumption, slowed from doubt-digit growth on a year-on-year basis in Q2 to single-digit in July (8.5%) and August (2.5%). But the situation is not likely to significantly improve in September, as the base effect becomes less favorable, and China still sticks to the strong restrictive measures to control the pandemic. Another indirect indicator influencing the wiliness to consume, namely, people’s outdoor mobility, also decelerated in Q3, and notably during August when containment measures were strictly in place. As such, our model projects a still positive but smaller contribution to growth from consumption in Q3. 

Investment also weakened in Q3. On the back of deteriorating business sentiment as indicated by the contraction of PMI, the growth of fixed asset investment significantly slowed (-0.8% YoY in July and 0.2% in August based on our estimates). The growth of non-manufacturing investment also worsened due to the recent regulatory crackdown and risks associated with the real estate market. Thus, we project a sharp decline in the contribution of investment to the aggregate growth rate in Q3. That said, the inventory investment ticked up in recent months, with industrial inventory investment accelerating from 9% YoY in March to 16.5% in September, which can serve as a buffer for the overall investment slowdown. Still, the build-up in inventory is not necessarily a positive sign for growth as it can also result from a weakening demand that outweighs supply, and thus is only statistically supportive to GDP in Q3 2021.

Foreign trade
Finally, foreign trade also started to drag on the Chinese economy. On the one hand, although the recovery of global economy has supported China’s external demand, the rising raw material costs and the recent power crunch have significantly limited China’s production capacity, which is bound to delay goods delivery. On the other hand, the rising commodity prices have pushed up the import value for China. In sum, a deceleration in exports and an acceleration in imports have led to a reduction in net exports, which has been a key engine of China’s economic growth since the beginning of the year. Based on the high-frequency data, our nowcasting model even points to a negative contribution of net exports to China’s growth in Q3.

All in all, we expect a sharp deceleration in growth in Q3 – as low as 4.9% YoY based on our nowcasting model, but this is quite consistent with our expectation. In fact, even with a 3.2% YoY growth in Q4, China will still be able to reach our expected growth rate of 7.8% for 2021.  The problem, thus, lies in 2022, especially in the first half due to a very negative base effect. As such, we are expecting much stronger government supports both fiscally and monetarily by year end to avoid such a growth cliff in 2022.
Best regards,  
Chief Economist Asia Pacific
Global Markets Research
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