The activity and spending indicators beat expectations. But retail sales and real estate activity are weaker than the headline figures suggest. And we think growth will resume its downward trend before long.
Strong headline figures only half the story
- The activity and spending indicators beat expectations. But retail sales and real estate activity are weaker than the headline figures suggest. And we think growth will resume its downward trend before long.
- Growth in industrial production strengthened from 4.7% y/y in October to a stronger-than-expected 6.2% in November (the Bloomberg median was 5.0%, our forecast was 5.8%). This was driven by a pickup in output growth among private firms as growth among state-owned ones fell. Growth on our own Industrial Output Index – which is based on output volumes of key industrial products – also jumped. (See Chart 1.)
- Retail sales growth accelerated from 7.2% y/y to a five-month high of 8.0% (Bloomberg 7.6%, CE 7.6%). But this was entirely due to price effects – food prices have surged recently – with sales growth much lower in real terms and unchanged last month. (See Chart 2.)
- Fixed investment expanded by 5.2% y/y year-to-date (Bloomberg 5.2%, CE 5.1%), implying that capital spending increased from 3.7% y/y in October to 5.2% last month. (See Chart 3.) This was the result of weak manufacturing investment being overshadowed by strong real estate and infrastructure construction.
- But floor space started by developers contracted year-on-year for the first time since 2017, dropping to a level more consistent with weak property sales. (See Chart 4.) This nudged down growth in total floor space under construction – a better guide to trends in real estate activity than the investment data, which are distorted by land purchases.
- Looking ahead, the phase-one US-China trade deal could boost both exports and corporate investment in the near term. But real estate, a key prop to growth in recent quarters, is primed for further moderation as financing to the sector is being squeezed by a regulatory crackdown. And with households still being squeezed by high inflation and slowing wage growth, consumer spending is likely to remain under pressure.
Chart 1: Industrial Production (real, % y/y)
Chart 2: Retail Sales (% y/y)
Chart 3: Fixed Investment (% y/y, nominal)
Chart 4: Real Estate Activity (% y/y)
Sources: CEIC, WIND, Capital Economics