Real GDP growth turned out to be a bit stronger than expected in Q3. Nevertheless, the Chinese economy continues to lose momentum due, at least in part, to government attempts to rebalance the economy.
A breakdown of the GDP data into its underlying demand components is not readily available. However, monthly data from the third quarter offer some clues concerning the sources of Chinese GDP growth in the recentlycompleted quarter. For starters, it appears that net exports provided a positive boost to the economy, as growth in the value of exports strengthened to 13 percent in Q3 from 5 percent in Q2 while import growth remained essentially unchanged at around 1 percent (middle chart). On the other hand, consumer spending probably provided less of a boost to overall real GDP growth, as growth in the nominal value of retail sales edged down to 11.9 percent in Q3 from 12.3 percent in Q2. That said, it would be inaccurate to characterize Chinese consumer spending growth as “weak” at present with the value of retail sales growing at a double-digit pace.
The Chinese government may apply some policy easing at the margin in an effort to “fine tune” the growth slowdown. However, a wholesale easing of policy as occurred in the immediate aftermath of the global financial crisis does not seem likely. The Chinese government simply does not want to gin up investment spending again only to risk a debt crisis in the future when the investment becomes economically unviable. Therefore, we forecast that real GDP growth in China will slow from our estimate of 7.3 percent this year to 6.8 percent next year and to 6.5 percent in 2016. The days of double-digit Chinese economic growth appear to be a thing of the past.
Real GDP Growth Edged Down in Q3
Recently released data show that real GDP in China grew at a year-over-year rate of 7.3 percent in Q3-2014 (top chart), which was a bit stronger than the consensus forecast had anticipated. That said, the Chinese economy clearly has lost momentum over the past year or so and, as we discuss in more detail below, it is unlikely to grow at a double-digit pace ever again.A breakdown of the GDP data into its underlying demand components is not readily available. However, monthly data from the third quarter offer some clues concerning the sources of Chinese GDP growth in the recentlycompleted quarter. For starters, it appears that net exports provided a positive boost to the economy, as growth in the value of exports strengthened to 13 percent in Q3 from 5 percent in Q2 while import growth remained essentially unchanged at around 1 percent (middle chart). On the other hand, consumer spending probably provided less of a boost to overall real GDP growth, as growth in the nominal value of retail sales edged down to 11.9 percent in Q3 from 12.3 percent in Q2. That said, it would be inaccurate to characterize Chinese consumer spending growth as “weak” at present with the value of retail sales growing at a double-digit pace.
Investment Spending Continues to Slow
The biggest source of slower growth in China, and one that should continue to exert downward pressure on the overall rate of real GDP growth, is investment spending (bottom chart). Investment spending, which includes residential and non-residential spending, accounts for nearly 50 percent of GDP in China. (In many advanced economies, including the United States, the comparable ratio is less than 20 percent.) In other words, the Chinese economy is unbalanced at present with an excess of investment, much of which has been financed via debt. Therefore, the slowdown that is underway in China is partially policy induced. The Chinese government is attempting to rebalance the economy toward proportionately more consumer spending before a full-blown debt crisis causes a “hard landing” in the Chinese economy.The Chinese government may apply some policy easing at the margin in an effort to “fine tune” the growth slowdown. However, a wholesale easing of policy as occurred in the immediate aftermath of the global financial crisis does not seem likely. The Chinese government simply does not want to gin up investment spending again only to risk a debt crisis in the future when the investment becomes economically unviable. Therefore, we forecast that real GDP growth in China will slow from our estimate of 7.3 percent this year to 6.8 percent next year and to 6.5 percent in 2016. The days of double-digit Chinese economic growth appear to be a thing of the past.
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