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What to watch in China GDP data as economic rebound strengthens

Booming export demand driving an industrial rebound.
Image: Yan Cong/Bloomberg

China is the only large nation that is expected to grow this year, with booming export demand driving an industrial rebound and the nation’s control of the Covid-19 outbreak allowing it to also reopen the domestic economy.

Data for the third-quarter due next week are predicted to show gross domestic product regaining all the ground lost in the first half of the year, according to a Bloomberg survey. Industrial output is forecast to continue its V-shaped recovery and retail sales are set to continue growing, although they’re still well below the level in 2019.

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“The recovery in China is on track while the drivers are changing,” Larry Hu, head of China economics at Macquarie Bank Ltd. in Hong Kong, wrote in a report last week. “Property and infrastructure fixed asset investment should hit their peak growth soon and the recovery ahead will be driven by the other half of the economy: manufacturing investment and consumption.”

Gross domestic product

China’s GDP suffered an unprecedented contraction in the first quarter after the nation basically shut down travel and economic activity to control the spread of Covid-19. That slump reversed from the April-June period, driven by a recovery in industrial output.

Even so, the economy is forecast to be only 0.7% larger in the nine months through September than it was in the same period in 2019. Before the Covid-19 pandemic, China had been expecting to set a growth target of “about 6%” this year.

What Bloomberg’s Economists Say…

China’s data are set to confirm the economy’s robust recovery extended into the third quarter, with GDP forecast to grow 5.3% on year. Monthly indicators of the supply side (industrial production) and demand (private investment and retail sales) will likely show momentum continuing before the final quarter of 2020.

Chang Shu, chief Asia economist

Private consumption

How strongly retail sales rebounds in September is an important area to focus on in the data. Consumer demand had been the missing element in the recovery so far, with shoppers spending about 9% less in the first eight months of the year compared to the same period last year.

Unless there’s a big jump in September and the remaining months of the year, retail consumption is likely to shrink for the whole of 2020, indicating the pain felt by the restaurant industry and small shops, which are large employers.

The nascent consumer recovery seen in the past few months looks to be reliant on richer Chinese spending on luxury goods and holidays, with many poorer people still hit hard by job and income losses due to the pandemic.

Industrial output

After a sharp contraction, Chinese industrial output rebounded, partly on strong export demand for protective gear such as masks and medical clothing, and also on sales of computing gear as people worldwide work from home. Exports in September rose 9.9% from a year ago, the fourth straight month of gains.

Early gauges for companies’ outlook in September also showed a continued rebound, with purchasing managers in manufacturing and non-manufacturing firms reporting a further improvement. The sub-index for new export orders also expanded, indicating that the export strength should continue.

Investment

China’s government has poured stimulus money into infrastructure spending this year, trying to boost the economy with targeted funding while avoiding inflating a property bubble. How much of that money has actually been used to pay for bridges, roads and other new infrastructure will be a focus in the data, as will the amount of money that has flowed into real-estate.

Jobs

The surveyed urban jobless rate is forecast to continue falling in September. However, this only covers a portion of the workforce and reliable and comprehensive data on the whole labor market is lacking.

Millions of people lost their jobs as factory, restaurant or delivery workers during the shutdowns, and an unknown number of those people are still without work, or haven’t returned from the countryside to the cities.

There was no direct income support during this pandemic for the unemployed in China, and even those who didn’t lose their jobs or have since found work will have lost income. So without a strong recovery in demand and jobs, it will be a long time before those people recover their lost income. The surveyed jobless rate is forecast to slip to 5.5%.

© 2020 Bloomberg

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