Expect the first negative GDP print in over 40 years

Q1 GDP to contract barring massive falsification

The government will publish Q1 GDP figures next week in what will be an unprecedented test of its willingness to acknowledge economic weakness.

There have been doubts about the GDP data for years. Most agree that official growth is at the very least smoothed, but there are a wide range of opinions on the extent to which the figures are flawed. Our view has long been that the National Statistics Bureau (NBS) tries to ensure the nominal GDP data are accurate but that it tweaks the calculation of the GDP deflator in order to meet annual targets for real growth. Our China Activity Proxy (CAP), suggests that annual growth has been overstated by around one percentage point on average during the past decade as a result.

The severe hit to economic activity from COVID-19 means that any manipulation of the Q1 GDP data would need to be unprecedented in scale to keep growth in line with official targets. GDP needs to rise at least 5.6% this year in order to achieve the Party’s goal of doubling the size of the economy between 2010 and 2020. But the evidence suggests that output fell outright in Q1. All major economic indicators contracted during the first two months of the year. (See Chart 1.) Even sectors that were among the best placed to weather the COVID-19 disruption such as post, telecommunications and software have seen their sales drop.

The March data are unlikely to be any better. Activity recovered last month relative to February, but high frequency data suggest that it remained weaker than the average across the first two months of the year. As a result, the indicators for which we already have full Q1 data mostly point to an even deeper contraction. (See Chart 1 again.)

In the past, efforts to nudge up official growth have involved massaging the key monthly data first, much of which feeds directly into the GDP calculations. So the fact that NBS have published such weak data recently suggests they have decided to be upfront about the extent of the downturn. Given this, we think GDP may fall 16% y/y in Q1.

A sharp contraction in Q1 GDP would have implications for the ongoing discussions over the 2020 growth target, which is due to be published at the National People’s Congress (rumored to be taking pace in the next month or so). Any target that is politically palatable would be unachievable in practice and so it is not out of the question that they opt not to set one at all.

The week ahead

In addition to Q1 GDP, we will also get most of the monthly indicators for March, nearly all of which probably contracted at a faster pace in year-on-year terms. The main exception is credit growth which we think will pick up on the back of policy support.

Chart 1: Key Activity Indicators (% y/y)

Source: CEIC, WIND, Capital Economics


Data Previews

CPI, PPI (Mar.) Fri. 10th Apr.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

CPI (% y/y)

09.30

(+5.2%)

(+4.9%)

(+4.3%)

PPI (% y/y)

09.30

(-0.4%)

(-1.1%)

(-0.9%)

Weak demand pulls down inflation

In the early days of the coronavirus outbreak, supply-chain disruptions offset some of the downwards pressure on inflation from weak demand. But these disruptions eased throughout March and should have resulted in a more sizable decline in inflation.

Weakening demand-side pressures probably pushed down core inflation, which excludes food and energy prices. Daily data also shows that food prices have fallen consistently in recent weeks. What’s more, the drop in global oil prices will probably have reduced headline CPI by around 0.2%-pts alone as it is highly correlated with fuel inflation.

Weekly data on producer prices also suggest that factory-gate deflation will have deepened last month. (See Chart 2.)

Chart 2: Producer Prices (%y/y)

Sources: CEIC, Capital Economics

Net New Bank Loans, M2, AFRE (Mar.) 10th – 15th Apr.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

Net New Bank Loans (RMB)

-

+905bn

+2,500bn

+2,200bn

M2 (% y/y)

-

(+8.8%)

(+8.6%)

(+9.0%)

Aggregate Financing “AFRE” (RMB)

-

+855bn

+1,750bn

+3,400bn

Credit growth picking up

In most countries, credit growth will slow sharply in response to COVID-19, as consumers defer large purchases and firms put investment plans on hold. But in China’s case, policymakers’ tight grip over the financial system has keep credit flowing.

The net increases in new bank loans and aggregate financing (AFRE), the PBOC’s measure of broad credit, almost certainly increased from February’s low levels last month. But the net issuance figures are highly seasonal, so we prefer to focus on growth in the outstanding values as these are a better guide to underlying trends in credit creation.

On this basis, bank loan growth probably picked up. Firstly, the improvement in activity since February should have nudged credit demand up. Mortgages – which make up about one-quarter of total bank loans – will have seen a big jump in March as property sales continued to recover. (See Chart 3.)

Regulators have probably become more tolerant of shadow banking in order to ensure that SMEs and private firms, who are poorly served by the regular banks, can access financing. In addition, growth in outstanding bonds picked up and is another sign that credit kept flowing last month. Overall, we think growth in outstanding AFRE accelerated in March.

Chart 3: Property Sales (% of 2019 level, 7d ave.)

Sources: WIND, Capital Economics

Trade (Mar.) Tue. 14th Apr.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

Exports (USD, % y/y)

-

(-17.2%)

(-13.9%)

(-20.0%)

Imports (USD, % y/y)

-

(-4.0%)

(-9.5%)

(-10.0%)

Trade Balance (USD)

-

-7.1bn

+20.0bn

+5.0bn

Demand slumps continues to weigh on shipments

Trade contracted in January and February (the data were combined prior to publication) as the COVID-19 outbreak disrupted port operations and factories shut down. (See Chart 4.) Those supply-side disruptions eased last month and as a result we think trade will have started to recover in m/m terms. But domestic demand remained much weaker than prior to the outbreak and demand abroad will have weakened as the pandemic gained momentum outside of China, holding back the recovery.

As a result, despite some improvement relative to February, shipments in March are still likely to have been weaker than the average of the first two months of the year, resulting in an even larger year-on-year contraction.

Chart 4: Goods Trade ($, % y/y)

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Sources: CEIC, Refinitiv, Capital Economics

Activity & Spending (Mar.) Fri. 17th Apr.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Industrial Production (% y/y)

10.00

(-13.5%)

(-7.0%)

(-15.0%)

Fixed Asset Invest. (ytd % y/y)

10.00

(-24.5%)

(-9.5%)

(-30.0%)

Retail Sales (% y/y)

10.00

(-20.5%)

(-8.8%)

(-25.0%)

Recovery slower than many had hoped

Activity and spending indicators plummeted during the two first months of the year due to the COVID-19 outbreak. But since January and February’s data were lumped together, they mask the full extent of the contraction in February.

While the daily data we track suggests that conditions improved in March relative to February, activity remains weak. (See Chart 5.) Coal consumption at power plants suggests that even heavy industry, which has held up better than most sectors, is still operating at 20% below normal levels. Data on passenger traffic suggests that daily life among consumers has been even slower to resume, with many still cautious due to the risk of a renewed outbreak and the increased uncertainty over their finances.

Investment seems likely to be hardest hit, however, with any pick-up in infrastructure spending unlikely to offset growing pessimism among property developers and manufacturers.

With the recovery progressing more slowly than many had initially hoped, the March data are likely to show an even deeper year-on-year contraction given that activity last month remained weaker than across January and February combined.

Chart 5: Daily Activity Indicators (% of 2019 level)

Sources: WIND, Ministry of Transport, Capital Economics

GDP (Q1) Fri. 17th Apr. / Sat. 18th Apr.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

GDP (% y/y)

10.00 (17th)

(+6.0%)

(-6.0%)

(-16.0%)

Full sectoral breakdown

09.30 (18th)

-

-

-

First contraction since the Mao era

China’s official GDP figures have attracted a lot of scepticism, including from us, for being implausibly stable and overstating the underlying pace of growth. But officials’ willingness to publish extremely weak activity and spending figures for January and February suggests that they might allow GDP growth to turn negative too.

In particular, there was a sharp downturn in the monthly data on output in industry and services, which together make up 85% of GDP. (See Chart 6.) These series have so far always been good predictors of the pace of growth in these sectors shown by the GDP data. Given that the March figures are likely to be even weaker (see the previous data preview), the data are consistent with a double-digit contraction in Q1 GDP.

The GDP breakdown is released a day after the headline data and contains some useful information. In particular, the breakdown covering services provides insight into the performance of key sectors such as tech and commercial services, for which high-frequency macro data are hard to come by.

Chart 6: Industry and Services Activity (% y/y)

Sources: CEIC, Wind, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (China)

Previous*

Median*

CE Forecasts*

April

Fri 10th

HK

Good Friday (National Holiday)

-

-

-

-

Chn

Producer Prices (Mar.)

09.30

(-0.4%)

(-1.1%)

(-0.9%)

Chn

Consumer Prices (Mar.)

09.30

(+5.2%)

(+4.9%)

(+4.3%)

Sat 11th

HK

Day After Good Friday (National Holiday)

-

-

-

-

Mon 13th

HK

Easter Monday (National Holiday)

-

-

-

-

Tue 14th

Chn

Exports (Mar.)

-

(-17.2%)

(-13.9%)

(-20.0%)

Chn

Imports (Mar.)

-

(-4.0%)

(-9.5%)

(-10.0%)

Chn

Trade Balance (Mar.)

-

-$7.1bn

+$20.0bn

+$5.0bn

Thu 16th

Chn

Home Prices (70 Cities) (Mar.)

09.30

+0.0%

-

-

Fri 17th

Chn

FX Net Settlement and Receipts (Mar., RMB)

10.00

+5.1bn

-

-

Chn

GDP (Q1, q/q(y/y))

10.00

+1.5% (+6.0%)

-10.0% (-6.0%)

-20.0%(-16.0%)

Chn

Industrial Production (Mar.)

10.00

(-13.5%)

(-7.0%)

(-15.0%)

Chn

Retail Sales (Mar.)

10.00

(-20.5%)

(-8.8%)

(-25.0%)

Chn

Real Estate Activity (Mar.)

10.00

-

-

-

Chn

Fixed Asset Investment (Mar.)

10.00

(-24.5%)

(-9.5%)

(-30.0%)

Chn

Surveyed Unemployment Rate (Mar.)

09.30

6.2%

-

-

Also expected during this period:

10th – 15th

Chn

Aggregate Financing “AFRE” (Mar., RMB)

-

+855bn

+2500bn

+3400bn

10th – 15th

Chn

New Net Lending (Mar., RMB)

-

+906bn

+1750bn

+2200bn

10th – 15th

Chn

M2 Money Supply (Mar.)

-

(+8.8%)

(+8.6%)

(+9.0%)

10th - 20th

Chn

Foreign Direct Investment (Mar.)

-

(-25.6%)

-

-

*m/m(y/y) unless otherwise stated; China is eight hours ahead of GMT.

Sources: Bloomberg, Thomson Reuters, Capital Economics

Main Economic & Market Forecasts

%q/q annualised (%y/y), unless stated

Latest

Q1 2020

Q2 2020

Q3 2020

Q4 2020

2019f

2020f

2021f

Official GDP

(+6.0)*

(-16.0)

(-6.0)

(+1.0)

(+5.0)

(+6.1)

(-3.0)

(+14.0)

GDP (CE CAP-derived estimates)

(+5.7)*

(-16.0)

(-6.0)

(+1.0)

(+5.0)

(+5.5)

(-3.0)

(+14.0)

Consumer Prices

(+5.2)***

(+4.1)

(+1.8)

(-0.1)

(-0.7)

(+2.9)

(+1.5)

(+1.5)

Producer Prices

(-0.4)***

(-3.0)

(-6.0)

(-5.0)

(-2.0)

(-0.3)

(-4.0)

(+4.0)

Broad Credit (AFRE)

(+10.7)***

(+10.8)

(+11.5)

(+12.0)

(+12.5)

(+10.7)

(+12.5)

(+11.0)

Exports (US$)

(-17.2)**

(-15.0)

(-48.0)

(-35.0)

(-19.0)

(+0.5)

(-30.0)

(+20.0)

Imports (US$)

(-4.0)**

(-12.0)

(-32.0)

(-14.0)

(+1.0)

(-2.8)

(-14.0)

(+28.0)

RMB/$

7.08

7.10

7.15

7.20

7.20

6.97

7.20

7.00

7-day PBOC reverse repo %

2.20

2.20

2.10

2.00

2.00

2.50

2.00

2.25

1-year Loan Prime Rate (LPR) %

4.05

4.05

3.85

3.75

3.65

4.15

3.65

3.90

1-year MLF Rate %

3.15

3.15

2.95

2.85

2.75

3.25

2.75

3.00

10-year Government Bond Yield %

2.50

2.59

2.70

2.70

2.70

3.14

2.70

2.90

RRR (major banks) %

12.5

12.0

11.5

11.5

11.5

13.0

11.5

11.5

Shanghai Composite Index

2,828

2,742

3,000

3,100

3,200

3,050

3,200

3,300

Hong Kong GDP

(-2.9)**

(-9.5)

(-13.6)

(-4.7)

(+0.3)

(-1.4)

(-7.0)

(+8.5)

Hang Seng Index

24,187

23,603

24,000

24,500

25,000

28,184

25,000

28,750

Sources: Bloomberg, CEIC, Capital Economics *Q4; **Jan & Feb.; ***Feb.; End of period


Julian Evans-Pritchard, Senior China Economist, +65 6595 1513, julian.evans-pritchard@capitaleconomics.com
Martin Lynge Rasmussen, China Economist, +65 6950 5701, martin.rasmussen@capitaleconomics.com

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Julian Evans-Pritchard Senior China Economist
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