Key Takeaways
- Despite the real estate downturn, China met its 5% growth target in 2023. But economic momentum at the end of the year was less strong than the headline numbers suggest. We believe falling prices at industry and retail levels point to overcapacity in some major goods markets.
- S&P Global Ratings maintains its 4.6% GDP growth forecast for 2024. But we project moderate consumption growth, given the outlook for real estate, confidence, and the absence of significant measures to support consumption.
- With relatively strong manufacturing investment, and soft consumption, the strain on prices and profit margins in goods markets may persist. More "rebalanced" growth, with more support for consumption and less for manufacturing investment, would mean less downward pressure on prices and margins.
China met its 2023 growth target--just. Momentum is slow and problems remain. Property woes, weak sentiment, and few measures to support household spending all point to moderate consumption growth. S&P Global Ratings believes "unrebalanced" growth--with an emphasis on investment rather than consumption--would raise the risk of deflation.
Outlook For 2024
We maintain our forecast of 4.6% GDP growth for China in 2024, outpacing most other major economies (see "Economic Outlook Asia-Pacific Q1 2024: Emerging Markets Lead The Way," published on RatingsDirect on Nov. 26, 2023). Recent developments, including the year-end data, have broadly been in line with our projections.
However, our 2024 growth forecast roughly aligns with our estimate of potential output growth. This implies that at a macroeconomic level the downward pressures on consumer inflation may not dissipate soon.
On current trends, the composition of China's growth will amplify the strain on prices and profit margins in several major goods markets. We project moderate consumption growth, given the outlook for real estate, confidence, and the absence of significant policy measures to support consumer spending (see "China Retail Sales Will Likely Grow Slower Than GDP This Year," published Jan. 22, 2024).
Meanwhile, following China's solid investment in manufacturing in 2023, we anticipate that the comparatively robust capex growth will continue in 2024, partly due to encouragement and support from policymakers.
In this connection, falling consumer prices point to the risk of more problematic deflation. Our baseline projection doesn't feature inimical deflation. But such deflation is a risk, given that prospects for consumption remain soft and confidence is weak amid the real estate woes.
Patchy Recovery
The National Bureau of Statistics (NBS) reported 5.2% year-on-year GDP growth in the fourth quarter of 2023 and for the year as a whole, broadly in line with our projection. And the NBS estimated that the economy grew 1% from the third quarter.
The real estate downturn continued at end-2023, with housing sales and prices retreating further. Real estate investment fell 11.5% year on year in the fourth quarter. The stock of unsold housing, as a percentage of total sales, has now matched the peak seen during the 2015 housing downturn. That is weighing on the market.
Still, overall investment growth picked up because of a solid expansion in manufacturing and infrastructure investment. Indeed, excluding real estate, fixed asset investment (FAI) growth has held up well year on year (see chart 1). Retail sales slowed on that metric and industrial production momentum remained unchanged last month.
However, economic momentum was less solid at end-2023 than the year-on-year data suggests. Key monthly indicators compared with the same month in pre-pandemic 2019 imply weak sequential momentum in retail sales and industrial production at end-2023 (see chart 2). These indicators adjust for the very bumpy trajectory in recent years, including the economic downturn in the spring and at the end of 2022.
Chart 1
Chart 2
Retail sales growth has been affected by some specific categories that are heavily exposed to the real estate downturn. However, momentum at end-2023 was also subdued for other categories--such as hotels and restaurants. Compared with the same month of 2019, so-called catering spending improved strongly in early 2023, following the easing of pandemic restrictions. But such spending hasn't strengthened since then, on this metric (see chart 3). FAI was stronger at end-2023 on this metric, although we suspect a statistical issue influenced the December number.
Retail sales and consumption more generally have lagged investment and industrial production substantially since 2019. Following a loss of momentum in rebalancing toward more consumption and services around 2015, China regressed on this front during the pandemic (See "The Case For Cautious Optimism On China's Rebalancing And Openness," published March 13, 2023). As we expected, there was some improvement in 2023.
But the rebalancing was modest last year, with consumption disappointing and the government responding by supporting growth largely via stimulating investment.
The combination of apparently robust real growth and weak nominal growth in industry in 2023 is problematic, in our opinion. NBS estimated nominal GDP grew 4.2% year on year in the fourth quarter and the GDP deflator fell 1%; together, this implies 5.2% year-on-year real GDP growth. GDP deflator is a broad measure of prices, and effectively converts nominal GDP growth into real GDP growth.
According to the NBS statistics, nominal growth was particularly weak for industry, at 2.2% year on year for the fourth quarter. By combining this figure with its estimate that the GDP deflator for industry fell 2.8%, it estimated that real GDP in industry rose 5.2% year on year.
NBS' statistical approach isn't mainstream, however. In our view, the GDP deflator for industry led to some overestimation of real GDP growth in 2023. As usual, the NBS used the change in the producer price index (PPI) as an estimate for the change in the GDP deflator for industry. This led to possible estimation problems that become significant when commodity (and purchasing) prices change appreciably. When, as in 2023, purchasing prices fall more than the PPI, the real growth estimate is skewed to the upside.
Regardless of the exact decline of the price of value added in industry, the downward pressure on prices in industry in part reflects overcapacity in several goods markets. The price declines in industry partly reflect declines in purchasing prices, which are passed on. But there are signs of overcapacity in important goods markets such as solar panels, cars and home appliances, leading to price cuts. This weighs on profit margins.
Consumer prices are also squeezed. Declines in food prices, especially of pork, have pushed down overall consumer prices. While rising prices of services keep year-on-year core inflation at about 0.6%, core prices have fallen month on month in recent months, pointing to a strain on prices outside food (see chart 4).
Chart 3
Chart 4
In our view, the stronger consumption is in 2024, the less policymakers will feel the need to support growth by boosting investment. In turn, the more "rebalanced" growth is, the faster that downward pressure on prices and margins will dissipate.
Editor: Lex Hall
Related Research
- China Retail Sales Will Likely Grow Slower Than GDP This Year, Jan. 22, 2024
- Economic Outlook Asia-Pacific Q1 2024: Emerging Markets Lead The Way, Nov. 26, 2023
- The Case For Cautious Optimism On China's Rebalancing And Openness, March 13, 2023
This report does not constitute a rating action.
| Asia-Pacific Chief Economist: | Louis Kuijs, Hong Kong +852 9319 7500; louis.kuijs@spglobal.com |
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