China: Nowcasting points to steeper slowdown - SCB

Analysts at Standard Chartered Bank explained that their model suggests that GDP growth decelerated to 6.4% y/y in July-August from 6.7% in Q2.

Key Quotes:

"Weaker FAI and IP activity and generally tighter credit conditions are the main drags."

"We expect a more significant slowdown in H2, although the downside risk appears curbed by policies."

Mostly domestic drags so far

"Our China nowcasting model puts GDP growth at 6.4% y/y in the first two months of Q3-2018, slowing from 6.7% y/y in Q2. The estimate is based on 42 monthly time series covering real activity, trade, monetary, exchange rate and price data. The result suggests that growth momentum softened more significantly amid domestic deleveraging and external trade tensions. 

Plummeting infrastructure investment was the main drag on fixed asset investment (FAI). 

Industrial production (IP) stabilised at a lower level of around 6.0% y/y, following a temporary acceleration in April and May that boosted IP growth to 6.6% y/y in Q2. 

Total social financing (TSF) growth continued to fall on shrinking off-balance-sheet financing. 

Higher US tariffs on Chinese products have started to dim export prospects, while the effect of more expansionary fiscal policy has yet to be felt.  

Taking the model result and other factors into consideration, we expect GDP growth to slow further to 6.5% y/y in Q3 and 6.4% in Q4. 

Weaker exports, softer housing market activity, and the lagged effect of tighter credit will likely weigh on growth in the quarters ahead. On the other hand, the authorities have introduced supportive measures to boost domestic demand, including tax cuts and fiscal spending on infrastructure, and a shift in monetary stance away from a tightening bias. We maintain our 2018 growth forecast at 6.6%."