Q3 GDP was as expected. The retail sales detail is promising for Q4 and 2022.
China GDP was consistent with our expectations in Q3, a 0.2% gain in the three months to September seeing annual growth slow from 7.9% in June to 4.9%.
Year-to-date growth for 2021 is now 9.8% compared to 0.7% at this stage in 2020 and a cycle peak of 18.3% in March 2021. To achieve our 8.5% full-year 2021 forecast, a 1.4% quarterly gain is necessary in Q4. With retail sales having rebounded in robust fashion in September (more below) and external demand strong as Q3 finished, a healthy gain seems probable in the three months to December.
While GDP detail is not available immediately each quarter in China, the monthly partial data for retail sales, industrial production and fixed asset investment provide a good sense of sectoral momentum through the quarter.
Of greatest significance in this instance is that, like in Q1/Q2, the threat of COVID-19 has quickly faded in China and consumers have responded with haste, annual growth in retail sales jumping from 2.5% to 4.4% in September against a consensus estimate of 3.5%. Spending on restaurants and catering was a big factor here, annual growth rising from -4.5% to +3.1%. Note however the NBS non-manufacturing PMI’s 6pt bound in September (released a fortnight ago) implies that it is not just restaurant spending that has rebounded.
There still remains considerable uncertainty over the immediate outlook for investment though. While Evergrande’s financial position continues to take all the headlines, the bigger issue for China’s economy is the time it is taking the sector as a whole to digest 2020’s regulatory changes, aimed at reducing leverage and better targeting construction to the needs of the rising middle class and those on low incomes.
It will likely be 2022 before the sector can fully reset. More broadly on investment, in 2022 and beyond, business investment will need to make a bigger contribution to total fixed asset investment if authorities’ growth ambitions are to be realised. This is true from an activity perspective, with property investment likely restricted to 7% growth instead of 10% annually, and as income growth will increasingly dictate maximum sustainable growth for the economy versus available debt.
A final point on production. The past six months have been a particularly trying time for global manufacturing. It is not surprising then that year-to-date industrial production growth has slowed from 14.1% in March to 3.1% currently. In the last month or so, power outages in China have been an additional headwind.
Given recent remarks by authorities with respect to securing necessary coal for power generation and preventing it from becoming uneconomic, we hold a continuation of these outages as a risk only. As for residential real estate investment, these issues should be fully resolved by the turn of the year, allowing the economy to expand by around 5.7% in 2022 after a 8.5% year-average gain in 2021. That said, we will continue to monitor the monthly data flow through Q4 for any evidence we are being too optimistic.
