China GDP: first-quarter growth ‘smashes’ expectations, but has Beijing put too many eggs in its basket?
- China’s widely watched gross domestic product (GDP) figure beat expectations in the first three months of the year, rising by 5.3 per cent compared to a year earlier
- Retail sales growth dropped to 3.1 per cent in March, while property investment fell by 9.5 per cent in the first quarter
1. GDP ‘smashed’ expectations in first quarter
The gross domestic product (GDP) growth in the first three months of the year “smashed” market expectations, according to Harry Murphy Cruise, economist at Moody’s Analytics.
“After a shaky start, China’s economy slowly found its footing in the first quarter. The 5.3 per cent year on year jump blew market expectations out of the water, with a more modest 4.8 per cent expansion predicted,” he said.
The better-than-expected result was buoyed by an uptick in investment, he added, along with an increase in industrial production.
Quarter on quarter, China’s economy grew by 1.6 per cent in the first three months of the year, up from a rise of 1.2 per cent from the previous three months.
“China’s economy performed better than the market expected in the first quarter. This was partly driven by external demand, as export volume improved by 14 per cent compared with a year ago,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.
2. Retail sales highlight difficulty in relying on consumption to drive growth
Month on month, retail sales rose by only 0.26 per cent from February.
“Year-on-year retail sales growth dropped sharply in March, mainly on a high base last year (when pent-up demand was released after China’s reopening),” said economists at Goldman Sachs.
And the data in March “illustrates that it will be difficult to rely on consumption alone this year to drive growth”, said Lynn Song, chief economist for Greater China at ING.
3. Property market woes continue
Property investment in China fell by 9.5 per cent in the first quarter year on year, compared with a fall of 9 per cent in the first two months of the year.
“The property market’s woes are continuing,” said Cruise at Moody’s Analytics.
“Absent the monster spending splurge of years gone by, real estate investment, dwelling prices and new dwelling sales are set to fall throughout 2024.”
4. Labour market remains soft
China’s overall urban unemployment rate stood at 5.2 per cent in March, compared with 5.3 per cent in the first two months of the year.
“The labour market is soft, with unemployment at 5.2 per cent and survey data of current job security being weak. That’s holding back household spending at a time when the economy desperately needs more,” said Cruise at Moody’s Analytics.
China is set to release youth unemployment data on Thursday.
5. Fiscal easing ‘kicking in’ as fixed-asset investment rises
Fixed-asset investment in China grew by 4.5 per cent in the first three months from a year earlier, compared with an increase of 4.2 per cent in the first two months of the year.
The pace of expansion also edged up in seasonally adjusted month on month terms, said analysts at Capital Economics, although “this was mainly driven by an acceleration in infrastructure investment thanks to recent fiscal support”.
Low private investment showed that there is still a high level of cautionLynn Song, ING
“Fixed-asset investment growth rose in March and beat consensus, indicating the effect of ongoing fiscal easing is gradually kicking in despite still-depressed property investment,” said economists at Goldman Sachs.
Private investment, meanwhile, grew by 0.5 per cent in the first three months of the year, while public investment rose by 7.8 per cent.
“Low private investment showed that there is still a high level of caution. We expect the public-led investment to continue to outperform for this year,” added Song at ING.
6. Industrial output misses expectations
Industrial output in China fell short of expectations and rose by 4.5 per cent in March year on year.
It also dropped by 0.08 per cent month on month from February, when industrial production was disrupted by the Lunar New Year holiday.
“Year-on-year industrial production growth declined meaningfully in March and missed expectations, due partly to fewer working days in March versus last year,” said economists at Goldman Sachs.
7. Positive start ‘bodes well’, but recovery clearly remains fragile
Economists at ANZ Research revised up their GDP forecasts for 2024 and 2025 to 4.9 per cent and 4.5 per cent, respectively, following the release of the first quarter GDP figure.
And Song at ING said the positive start to the year “bodes well” for China to achieve its “around 5 per cent” growth target for 2024.
“The strong first-quarter growth figure goes a long way in achieving China’s ‘around 5 per cent’ target for the year. But medium-term growth prospects hinge on broadening the economy’s growth drivers. If the officials can’t convince households to loosen the purse strings, the economy risks having too many eggs in one basket,” said Cruise at Moody’s Analytics.
Capital EconomicsZhang at Pinpoint Asset Management said the “strong first quarter growth” would make the government comfortable with the current policy stance.
And with the probability of an interest-rate cut by the US Federal Reserve declining, the chance of a rate cut by the People’s Bank of China has diminished, he added.
“The recovery clearly remains fragile. While we expect short-term fiscal stimulus to continue to support the economy, this is unlikely to prevent a renewed slowdown. And the economy is facing structural headwinds, particularly in the real estate sector,” added analysts at Capital Economics.