China : GDP forecast revised down for 2019
The latest Chinese GDP growth figures show that the world’s second largest economy decelerated further in the third quarter of this year. According to the official statistics, the Chinese economy expanded by 6.0% year-over-year (y-o-y) in real terms in Q3, down from 6.2% in Q2 and slightly below our own expectation and the market consensus (both at 6.1%). This is the lowest quarterly growth rate that China has had since the Chinese statistical authority started publishing the quarterly GDP series in 1992.
In light of the weaker-than-expected Q3 figures, we have revised down our Chinese GDP forecast for 2019 to 6.2% from 6.3% previously. The weakness mainly lies in the industrial and the agricultural sectors. The industrial sector, which accounts for nearly 40% of Chinese GDP, expanded by 5.2% y-o-y in Q3 2019, down from 5.6% in Q2 and 6.1% in Q1. The ongoing US-China trade war is a major factor behind the deceleration in industrial activities as exports slump. In addition, the softness in domestic consumption and fixed investment have also contributed to the slowdown in the industrial sector.
Looking to the decade ahead, Chinese GDP growth will most likely stay on a downward trend as the economy faces some structural headwinds, especially on the external front. While a trade truce between the US and China now looks likely in the near term given trade talks have restarted, the possibility of all the existing tariffs on Chinese exports to the US being removed is slim. More importantly, we believe that Chinese growth is on a secular downward trend, driven by its ageing population, reduced cost competitiveness and declining returns on capital investment.
However, there are signs of recovery in near-term domestic demand. First, infrastructure investment showed some improvement in Q3. Second, the current destocking cycle in the industrial sector seems to be coming to an end. Third, consumers will likely remain resilient in Q4. Retail sales growth has been on a downward trend throughout 2019, mainly driven by the slump in auto sales. With these positive developments, combined with the possible de-escalation of trade tensions with the US in the near term, we expect a modest recovery in growth momentum towards the end of this year.