On the official figures, China’s economy expanded at the fastest pace in two years last quarter. The monthly data suggest that growth dropped back slightly heading into 2021 but it remains strong. We think this strength will persist during the first half of this year, before giving way to a weaker second half.
Strong end to 2020 pushes Q4 GDP above pre-virus rates
- On the official figures, China’s economy expanded at the fastest pace in two years last quarter. The monthly data suggest that growth dropped back slightly heading into 2021 but it remains strong. We think this strength will persist during the first half of this year, before giving way to a weaker second half.
- GDP grew 6.5% last quarter, up from 4.9% y/y in Q3 (the Bloomberg median was 6.2% and our forecast was 7.0%). The GDP figures often need to be taken with a grain of salt. But our in-house measure, the China Activity Proxy (CAP), also points to a marked pick-up in growth last quarter despite showing a deeper downturn earlier in the year. Our initial estimate, based on full data for October and November and partial data for December, is that the economy grew 7.4% y/y in Q4, up from 4.9% in Q3. (See Chart 1.)
- The breakdown of the GDP data shows a further pick-up in industry and construction last quarter, from 6.0% y/y to 6.8%. (See Chart 2.) But the biggest tailwind was the improvement in service sector growth, from 4.3% y/y to 6.7%. A more detailed breakdown will be published tomorrow.
- For 2020 as a whole, GDP expanded 2.3%, narrowly below our forecast of 2.5%. Although this is the slowest growth since 1976, it is still a better turnout than most had expected following the record slump in Q1 and vindicates the view we have held since last June that China’s rebound would surprise to the upside.
- In order to gauge the economy’s current momentum, it makes sense to focus on the December data that were also released today. The data were generally a bit weaker than in November. (See Chart 3.) Growth in industrial production rose from 7.0% y/y to 7.3% (Bloomberg 6.9%, CE 7.0%). But the services production index dropped back from 8.0% y/y to 7.7%. So too did retail sales, which declined from 5.0% y/y to 4.6% (Bloomberg 5.5%, CE 6.5%).
- Fixed investment expanded 2.9% year-to-date (Bloomberg 3.2%, CE 3.4%), implying that the pace of capital spending slowed from 9.7% y/y in November to 5.6% in December. While growth in property investment eased, it remained the fastest growing category. (See Chart 4.) After an uptick in November, growth in manufacturing declined. And infrastructure investment continued its downward trend, suggesting that fiscal support is waning.
- The real estate data were mixed. New starts accelerated but are still consistent with a further slowdown in property investment over the coming quarters. In contrast, sales growth edged down but remained relatively strong. (See Chart 5.) That said, the recent slowdown in property price gains points to relatively subdued underlying demand. Instead, the uptick in sales reflects a rush among developers to offload units at discounted prices to shore up their cashflows in response to restrictions on their borrowing introduced last August. Sales will probably drop back this year, not least because new limits on bank lending to the property sector will curtail the availability of mortgages.
- Stepping back, the big picture is still that activity remains strong, which is helping to support the labour market. After dropping back in previous months, the surveyed unemployment rate held steady at 5.2% in December, the level at which it was at pre-virus. (See Chart 6.) And the decline in migrant workers employed in urban areas narrowed last quarter from -2.1% y/y to -1.8%. With the labour market largely back to normal, income growth is rebounding. (See Chart 7.)
- We think the outlook remains bright in the near-term. Despite the latest dip in retail sales, we see plenty of upside to consumption as households run down the excess savings they accumulated last year. (See Chart 8.) Meanwhile, the tailwinds from last year’s stimulus should keep industry and construction strong for a while longer. Favourable base effects will also help keep growth rates elevated until at least the middle of this year. Further ahead, however, we think growth will soften. Foreign demand for Chinese goods will drop back as vaccines start to reverse the recent shift in global consumption patterns. And domestic policy support will be partially withdrawn throughout this year.
Chart 1: GDP & CE China Activity Proxy (% y/y)
Chart 2: GDP (% y/y)
Chart 3: Activity & Spending (% y/y)
Chart 4: Fixed Asset Investment (% y/y)
Chart 5: Real Estate Activity (sqm, % y/y)
Chart 6: Surveyed Unemployment Rate (%)
Chart 7: Household Income (RMB, % y/y)
Chart 8: Household Savings Rate
Sources: CEIC, WIND, Capital Economics