Chinese GDP Growth Tops Estimates in Q4-2014

Real GDP in China grew 7.3 percent on a year-ago basis in Q4, which was a bit stronger than most analysts had expected. The lack of inflation opens the door for monetary ease to help support economic growth. 

Investment Continues to Lead Slowdown in GDP Growth

Data released today showed that real GDP in China grew 1.5 percent on a sequential basis (roughly 6 percent at an annualized rate) in Q4-2014 relative to the previous quarter. The sequential rate of growth was lower than most analysts had expected, but upward revisions to past quarters produced a year-over-year rate of 7.3 percent, which was actually a bit stronger than the consensus forecast had anticipated (top chart). Despite dire predictions among some observers, the Chinese economy has not crashed and burned, at least not yet. Rather, it appears that a “soft landing” may be in the making.

There is no denying, however, that growth in the Chinese economy has slowed over the past few years, and that double-digit growth rates are a thing of the past. Indeed, real GDP grew 7.4 percent in 2014, the slowest rate of Chinese economic growth since 1990. The slowdown has been led by deceleration in fixed investment spending (middle chart). Not only has growth in business investment in plant and equipment slowed, but residential investment growth has also downshifted. Moreover, some of this slowdown reflects a conscious policy choice. Years of blistering growth in capital spending has left the Chinese economy dangerously unbalanced with investment spending accounting for more than 40 percent of GDP. Policymakers are attempting to switch the drivers of growth from superheated capital spending to more consumer spending.

In that regard, monthly data show that nominal retail spending grew 11.9 percent year-over-year in December. To look at growth in retail spending in real terms, we deflated the nominal figure with the headline CPI, which resulted in a growth rate of 12.5 percent on a sequential basis in Q4. This is a solid reading, and is perhaps an early sign of success of new economic policies. In addition, export growth was up 8.7 percent for the three months ending in December. If, as we expect, other countries begin to see economic growth pick up throughout 2015, there could be some upside potential to export growth in China.

Lack of Inflation Opens the Door for Monetary Ease

As in most countries, CPI inflation in China has receded in recent months. The year-over-rate of CPI inflation stands at only 1.5 percent at present, and further declines seem likely in coming months due to lower energy prices (bottom chart). Moreover, slower growth and core inflation trending lower gives the People’ Bank of China (PBoC) scope to ease monetary policy in an effort to support economic growth. Indeed, we look for the PBoC to reduce lending rates and reserve requirements this year. That said, any policy support this year likely will be incremental rather than wholesale. Unless the Chinese economy starts to collapse, which we do not expect, Chinese authorities are unlikely to open the policy taps fully à la 2008-2009. Slower economic growth in China is here to stay.