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China: Growth slows in first quarter

Economic Comment

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China´s economic growth slowed in the first quarter of 2013, against expectations. Chinese authorities don’t seem too concerned (yet) and take a cautious approach regarding further growth supporting policies. China´s growth estimate for 2013 is lowered to 7.5%-8%.

Contrary to expectations, China’s real GDP growth weakened to 7.7% year-on-year (yoy) in the first quarter of this year, down slightly from the 7.9% posted in the last quarter of 2012. On a quarter-on-quarter basis, real GDP growth slowed from 2% in 4Q2012 to 1.6% in 1Q2013. In the first quarter, investment growth disappointed, increasing by a lower than expected 20.9% yoy. As a result, capital formation added only 2.3 percentage points to the total first quarter growth rate. Domestic consumption, partly driven by the construction sector, overtook investment as China’s most important growth driver, contributing 4.3 percentage points. The external sector contributed the remaining 1.1 percentage points.

It appears that March in particular was a weak month, as industrial production growth slowed to 8.9% yoy, from 9.9% in January and February. In addition, electricity production growth, a good proxy for economic activity in China, was also much weaker in March (+2.1% yoy) than in the first two months of the year (+3.4% yoy).

As real GDP growth - at last - accelerated again in the fourth quarter of 2012, after slowing down each of the preceding 6 quarters, it was widely expected that China´s economy would continue to strengthen in the first quarter of 2013. After all, monetary easing and stimulus measures implemented over the course of last year seemed to be positively working through to the real economy. Moreover, purchasing managers had been more positive about China´s economic future as well. Furthermore, credit grew strongly in the first quarter, which also pointed to strong economic activity. As it turns out, celebrations regarding an economic recovery started too early.

Supporting growth on the short-term has become more problematic. First of all, the real estate sector proved important in supporting both investment and consumption growth in the first quarter. However, the government is concerned about the buildup of a real estate bubble and has recently enhanced measures aimed at cooling the housing market. Although a prudent and welcome policy stance, it will subdue the real estate sector, and thus overall economic growth if maintained.

Figure 1: Growth disappoints in first quarter
Figure 1: Growth disappoints in first quarterSource: EIU, NBS China
Figure 2: Industrial production slows
Figure 2: Industrial production slows Source: Reuters EcoWin, NBS China 

Secondly, authorities are also more concerned about strong credit growth and resulting risks to the banking sector. As a result, measures to better manage these risks have been implemented recently after credit growth increased very strongly in the first months of the year. As a result, credit expansion, another important driver of investment and consumption, might slow in the coming months as well.

If desired, China´s policy makers would have to resort to a new round of stimulus spending to support growth, which is usually financed by bank loans. Also, easing measures aimed at cooling the housing market again would be a possibility. However, with authorities concerned on both the banking and real estate sectors, this is unlikely to happen. In addition, rapid credit growth in 1Q2013 might start to push up inflation in the months ahead. At present, this is not a concern, as consumer prices rose by 2.1% yoy in March, down from a Chinese New Year-induced spike of 3.2% yoy in February. However, inflation is expected to rise beyond the People´s Bank of China´s 3.5% inflation target by the end of the year. Recent outbreaks of bird flu could push up food prices even sooner. Wary of rising inflation, Chinese authorities will take a cautious approach to implementing new stimulus measures.

In all, China´s government will continue to work to maintain real GDP growth at 7.5% in 2013, as this will remain their main priority. At the moment, this appears to be achievable and the government doesn’t seem very concerned about the slowdown (yet). However, relatively weak performance of advanced economies may have a weakening effect on growth in China through weaker than anticipated external demand growth. If China’s economic growth would continue to disappoint, boosting the economy will be more risky than before. The government has to take caution in using its usual instrument – credit fueled investment stimulus – in order not to enhance financial sector risks. If housing market measures are eased too much, this increases the risk of problems in the real estate market later on. Premier Li Keqiang described China´s economic outlook as “murky”. Even so, following the first quarter figures and barring a rapid increase of inflation, China´s real GDP growth estimate for 2013 has been lowered to between 7.5% and 8%, down from 8%-8.5%.

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