Chinese real gross domestic product (GDP) rose by 6.5% (year-on-year) in the third quarter of 2018, a touch weaker than the consensus expectation for a 6.6% advance. This is down from a 6.7% advance in the second quarter, and marks the slowest 12-month change since the first quarter of 2009. On a quarter-over-quarter basis, growth ticked down to 1.6% (prev: 1.7%) or roughly a 6.6% annualized pace. This was broadly in line with the consensus estimate. Historical revisions to previous quarters help to mark down 2017 annual growth by about 0.2 ppts to 6.8%, and weigh slightly against annual growth in 2018 as well.
Nominal GDP grew 9.6% (y/y) in the third quarter, a bit weaker than the 9.8% advance recorded in the second quarter. The GDP deflator rose 2.9% y/y, the same pace as the previous quarter.
On an industry basis, the slowdown was concentrated in the secondary sector (construction and manufacturing), with growth easing to 5.3% on a year-on-year basis from 6% in the second quarter. Primary industry (e.g. agriculture and mining) registered a 3.6% year-on-year advance. Activity in tertiary (services) industries – the largest sector of the Chinese economy – registered a 7.9% y/y advance, a slight uptick from the second quarter.
Monthly activity indicators signal that the deceleration in growth is likely to extend into the fourth quarter. The reading for fixed asset investment (excluding rural areas) in September was a bit firmer than consensus expectations, coming in at 5.4% growth (y/y, year-to-date basis), but remains well below historical norms. The pace of fixed investment is a far cry from post-financial crisis highs in early-2013 when it was rising by around 20% per year, reflecting the shift away from investment toward services, and more recently, efforts by Chinese authorities to rein in excessive credit growth. Industrial production for September missed consensus expectations (+5.8% y/y vs. 6%), but retail sales managed to just beat expectations (+9.2% y/y vs. 9%). Nevertheless, retail sales growth remains below the 10-11% y/y pace typical of the past few years.
Key Implications
This report confirms that China’s economic growth is easing broadly as expected, and reflects a combination of domestic policy action to slow credit growth as well as external pressures. Growth in total social financing has slowed materially through September, rising 10.6% y/y from a high of 12.7% at the start of 2018. This is despite the impact of U.S. tariffs which have added an extra layer of downside risk to growth and led policymakers to ease credit conditions since the start of the year. All told, today’s report remains consistent with our September forecast update that expected Chinese economic growth to slow from a 6.6% pace in 2018 to a 6.2% pace in 2019.
An escalation in the trade spat to include a 25% tariff on all Chinese imports to the U.S. with limited Chinese retaliation could shave up to 0.5ppts off China’s economic growth over the next year or so. However, Chinese policymakers have reacted by easing domestic credit conditions, have allowed a more than 8% depreciation in the renminbi relative to the U.S. dollar to offset much of the effect from U.S. tariffs, and are likely to ramp up fiscal stimulus spending in the months ahead if growth begins to decelerate more than anticipated. However, there remains a concern that a protracted trade spat with the U.S. could begin to endanger growth in both countries’ East Asian supply chain partners, which could weigh further on global trade and economic growth.
