GDP destroys forecasts but hides dangerous cracks

China’s economic growth has beaten experts’ forecasts in the first quarter of 2024, which at first glance seems like a very positive fact that paves the way for the country’s economy to enjoy intense expansion this year. In a first approximation and without delving into the data, the industry seems to once again pull the wagon of an economy that is experiencing a true transition towards a model in which internal demand gains weight and the foreign sector should increasingly be a part less relevant to GDP. However, when you dig a little deeper into the data and China’s economy you can see that something smells rotten. Within this ‘awakening’ shown by the most superficial data, China is facing a real estate crisis and an excess of debt that is putting the country’s economy in serious difficulties.

The gross domestic product (GDP) increased by 5.3% in the period from January to March compared to the previous year, data released Tuesday by the National Statistics Office showed. That’s higher than the median estimate of 4.8% in a survey of economists. Bloomberg and just above a 5.2% growth rate in the final quarter of 2023. However, the main headline is that industrial production growth was truncated in March and retail sales growth was slower than the expected. The other big headline is that investment increased the GDP figure.

It is true that the Manufacturing sector obtained better results, with a year-on-year growth of 6.7% in the first quarter, among which the high-tech segments grew by 7.5% year-on-year. However, this masks the broad deterioration in industrial production in March, which fell 0.1% month-on-month. The strong relative increase in production capacities without a proportional improvement in demand reduced capacity utilization rates, which fell to 73.6% in the first quarter, the lowest since the first quarter of 2020.

On the demand side, the retail sales were the most disappointing (relative to expectations) in March (3.1% year-on-year versus 5.1% expected and 5.5% previously), as sales of consumer and restaurant goods normalized after the temporary boost related to the festivities in January-February. As for products, sales of relatively expensive items slowed in March, including construction and decoration items, furniture and automobiles.

A GDP figure that hides weaknesses

“China’s data looks strong in the headlines, but the details are weak. This would suggest the economy needs more support and markets will continue to prepare for a weak yuan,” said Charu Chanana, head of currency strategy at Saxo Markets in Singapore.

From Commerzbank they follow the same line and explain that a good part of this data is due to uneven growth and the first two months of the year, which have been better than expected: “The monthly data suggest that growth slowed in March after a good start to the year. Growth remained very uneven. Investment was strong, supported by policy stimulus, but consumption growth was weak.” “Conflicting signals from improving PMIs and moderating activity growth in March cast doubt on whether the economic recovery seen early this year will be able to be sustained,” say the German bank’s experts.

He China’s growth target for this year is around 5%. Many economists say the government will have to take more steps to stabilize the housing market and encourage consumers to spend toward the goal. Investors are closely watching a major government effort to boost domestic demand this year: a trade-in program that will encourage businesses to upgrade their machinery and households to buy new cars, refrigerators or washing machines. Shares of Chinese appliance makers rose last week after officials promised “strong” fiscal support for the plan.

“As we had anticipated, real GDP gained pace sequentially in the first quarter, supported by improved manufacturing sector results, holiday-driven household spending, and the impact of policy easing on investments. However, monthly activity data for March suggests that the momentum has faded more recently,” Oxford Economics analysts agree. “With a likely considerable build-up of inventories in the first quarter (and therefore increasing stockout pressures in the second), the normalization of post-holiday retail sales, the weakness and unpredictability of external demand and a still cautious stimulus, we now hope that growth slows in the second quarter“, they predict.

According to the analysis house, the data for the first quarter (and March) also clearly showed the difficulties that will continue to affect the Chinese economy this year: “The foreign demand conditions they still are unpredictably treacherous, as demonstrated by the strong downward surprise in exports from the main trading partners (except ASEAN) in March. And this despite the fact that Chinese products are, for the most part, competitive in exports. Cyclical disinflationary pressures (due to the recent moderation in prices of food and tourism-related services) also can entrench a more structural deflationary mentality among consumers“.

Regarding economic policy, they maintain in Oxford, acceptable growth above the target should alleviate the strong stimulus measures. “We expect the issuance of State bonds to recover in the third quarter, after a pause in the first half of this year, as income from previously approved issues and accumulated fiscal deposits are used,” they conclude.

“In recent months we have talked about the changes in the drivers of growth in China, and this month’s data further illustrates this development. Investment was the key to better GDP results in the first quarter, while the main driver of last year’s growth, consumption, has moderated. Net exports have also remained weak and have not contributed greatly to growth,” ING Economics points out. From the ‘orange’ bank they suspect that the GDP deflator may also have influenced in the best results of the quarter, since inflation has remained low at the beginning of the year.

“The recovery remains clearly fragile. While we expect short-term fiscal stimulus to continue supporting the economy, it is unlikely to prevent a further slowdown. And the economy faces structural headwinds, especially in the real estate sector. Despite continued declines in home sales, which continued into March, the correction in real estate construction has only just begun. We expect a strong downward adjustment in the coming years, which will hamper economic growth in the medium term,” say Capital Economics analysts.

The eternal abyss of housing

Along with the growth data, housing data was published this Tuesday, the great Achilles heel of the Chinese economy. Average house price data in 70 cities showed that house prices have not yet bottomed, with new home prices falling -0.34% month-on-month and -0.53% month-on-month in secondary housing prices. The silver lining was that the overall sequential decline was slower than in previous months, the smallest decline since September 2023. New homes showed some positive signs, with 11 of the 70 cities recording an increase in median prices. The secondary market remained downward, with 69 of the 70 cities still with declining prices.

In the first quarter of 2024, the sales value of newly built residential properties contracted sharply by -30.7% year-on-year. Office and commercial properties continued to perform better, with a year-on-year increase of 6.3% and 1.5%, respectively.

Housing inventories have been accumulating this year and, given the sluggish sales, it is not surprising that real estate investment continued to show negative growth. Real estate investment continued to slow down to -9.5% year-on-year, compared to -9.0% in the first two months. New housing starts fell 27.8% year-on-year, while those completed did slightly better, at -20.7% year-on-year.

“As the fund has not yet been confirmed, we hope that the real estate sector continue to be a burden important for growth this year. It is likely that in the coming months policies will continue to be necessary to stabilize the market,” they analyze from ING.