China is rebounding, but a boost in domestic demand is needed – Institutional Investors
China’s economy rebounded strongly in the third quarter to recover all the output lost during the Covid-19 shutdowns earlier this year.
Production increased by 3.9%, seasonally adjusted, in the three months to September 30, which means that the annual rate of GDP growth rose from 0.4% in the second quarter to 3.9 % in the third quarter. The result is better than expected by analysts.
The consensus was for growth of 3.5% q/q and 3.4% y/y respectively. And if anything, a weak set of September PMIs, coupled with the unusual lag in the national accounts during the week of the ruling Chinese Communist Party Congress, had raised suspicions that growth would be weaker than expected.
September activity data, which was released alongside the full third-quarter national accounts, showed industrial production unexpectedly accelerated last month on better-than-expected export data. Industrial production growth accelerated to 6.3% y/y from 4.2% y/y in August.
However, it seems unlikely that the economy can continue to rely on this engine of growth for long. After all, new export orders surveyed have resumed their downward trend and global demand for manufactured goods is expected to weaken significantly in the coming months as high inflation and rising interest rates stifle Requirement.
Therefore, it is now up to domestic demand to drive future growth. We have argued for some time that the domestic economy will begin to benefit from a cyclical improvement from the end of the third quarter. It is also promising that recent data has brought tentative signs of stabilization in the real estate sector after additional targeted policy.
However, the Party Congress revealed no major additional support for housing, or even the broader economy. And with consumers still hesitant about potential lockdowns to control Covid-19 outbreaks, we continue to expect a fairly shallow recovery. We forecast GDP growth of 3.3% this year with a recovery to 5% in 2023.