Economic activity continued to decelerate at the outset of the year on the back of global headwinds, still-challenging domestic conditions and authorities’ efforts to promote a more balanced economic model at the expense of weaker short-term growth. China’s GDP increased 6.7% annually in Q1, which came in marginally below the 6.8% expansion observed in Q4. The print represented the weakest expansion since the height of the global financial crisis in Q1 2009 and was in line with market analysts’ expectations.
Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, additional data suggest that weak global demand hit the external sector in Q1, while growth in private consumption moderated in the same period partially reflecting a sharp plunge in China’s stock markets at the outset of the year.
Nominal merchandise exports continued to contract in Q1, falling 9.6% year-on-year, which represented the sharpest contraction since 2009. The deterioration mainly reflected subdued global demand. Meanwhile, imports continued to contract at a double-digit rate in Q1, reflecting the deceleration in Chinese domestic demand and low commodity prices. Slower growth in retail sales suggests that private consumption may have moderated at the outset of the year partially due to the plunge in the stock markets observed in the first weeks of January. Without adjusting for inflation, growth in retail sales fell from 11.1% in Q4 to 10.3% in Q1.
On the upside, a looser monetary policy and decisive government support translated into stronger growth in China’s traditional growth engine, investment. Urban fixed-asset investment—which covers infrastructure and factory construction—expanded 10.7% in the first three months of the year, which was above the accumulated 10.0% rise in the full year 2015.
Moreover, overall nominal GDP grew 7.2% in Q1, which was above the 6.1% increase tallied in Q4, implying that the overall economy emerged from deflation.
While the deceleration observed in Q1 is consistent with Chinese authorities’ willingness to tolerate slower growth under the “new normal” approach, more detailed data suggest that the leadership might have used the old recipes—cheap credit, government support and investment—to shore up economic growth. That said, the fact that the tertiary sector’s share of GDP increased by 2.0 percentage points to 56.9% suggests that the fundamental economic restructuring is continuing in 2016. The latest indicators for March corroborate that growth in China will remain robust as bold support from authorities has started to feed into the economy.
The Chinese government has set a growth target of between 6.5% and 7.0% for 2016. Focus Economics Consensus Forecast panelists expect GDP to expand 6.5% in 2016, which is unchanged from last month’s estimate. In 2017, the panel sees economic growth coming in lower at 6.2%.
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