China’s GDP growth came in weaker than expected at 7.7% for the year to March 2013. That compares with average market forecasts of around 8.0%. While this is still above the recent cyclical trough of 7.4% in the September 2012 year, it’s down on the 7.9% for the year to December 2012. We still believe China is in a modest upswing, but we can now add the occasional setback to the outlook. It also means downside risk to our forecast of 8.2% growth for the calendar 2013 year.
My assumption was that plentiful credit would be sufficient to see the Chinese economy gather further momentum in the first quarter of 2013. Only last week March data showed M2 money supply growth of 15.7% and 2.54 trillion in total social financing. By itself that suggested March quarter growth might surprise on the upside, not the downside.
Weak investment was the catalyst for the disappointing result. In terms of percentage point contributions to the annual result to March, consumption added 4.3ppt, up from 4.1ppt in the year to December. However, the contribution from investment dropped from 3.9ppt to a surprisingly low 2.3ppt. The balance is net exports which added a robust 1.1ppt, up from -0.2ppt previously.
On a quarterly basis growth slowed from 2.0% q/q in December to 1.6% q/q in March. We don’t read too much into the quarterly data, but nevertheless that represents a clear loss of momentum over the quarter. In fact this quarter is the weakest since the first quarter of 2012 – that’s also a surprise given how loose monetary and fiscal policy have been over the past year.
To make up a troika of surprises, industrial production slowed to an annual growth rate of 8.9% in the year to the March month (9.5% for the March quarter). That’s its lowest level since August last year. Official manufacturing PMI data was held around the 50-51 level over the past few months, but that’s not indicative of a sharp rebound on the horizon. Indeed one the reasons we believe core inflation will only rise gradually from here is because of the spare capacity that exists in the manufacturing sector.
Looking ahead loose monetary and fiscal policy will continue support activity growth going forward. The lower-than-expected March consumer price index result means there is no immediate concern about inflation. Together, the weaker growth and inflation data support our view of no tightening in monetary conditions until 2014. However, I still don’t believe there’s too much room for new stimulus – that might just create bigger problems down the track. And the authorities will be sure to maintain their commitment to the quality of growth rather than the quantity.
On the growth downside, however, I’d be surprised if the strength of the contribution from net exports were sustained into the current quarter. Indeed March export growth slowed to a lower than expected 10% in March, down from the 21.8% level of January-February. While we thought that was too strong, the size of the dip in March was surprising as was the imports growth rate which came in at a higher than expected 14.1%.
Our China story for 2013 was one of a modest upswing in growth. I’m still happy with that story. I think this latest result is one of “upswing postponed” rather than “upswing denied”. So I am, somewhat nervously, hanging onto my 8.2% forecast for this year. For now.