Chinese real gross domestic product (GDP) rose by 6.8% (year-on-year) in the first quarter of 2018, in line with consensus expectations. On a quarter-over-quarter basis, growth slowed to a 1.4% (5.7% annualized) pace, reflecting disruptions in activity due to the Lunar New Year holiday period. Small but largely offsetting revisions to economic growth in the first and second quarters of 2017 have little impact on estimated annual growth for last year.
Nominal GDP grew 10.2% (y/y) in the first quarter, somewhat slower than the 11.1% pace recorded in the fourth quarter. The GDP deflator rose 3.2% y/y, a full percentage point less than the previous quarter.
On an industry basis, growth was broad-based. Primary industry (e.g. agriculture and mining) registered a 7.6% advance, while activity in the secondary industry (construction and manufacturing) rose 6.5% – the fastest pace in a year. Growth in tertiary (services) industries, the largest sector of the Chinese economy, registered a 7.6% y/y advance, but was the weakest pace recorded since the third quarter of 2016.
Monthly activity indicators were somewhat mixed. The reading for fixed asset investment (excluding rural areas) in March was below consensus expectations (+7.5% y/y vs. 7.7%), and remained at a sub-8.0% pace (reported on a year-over-year, year-to-date basis) for the third consecutive quarter. Fixed asset investment has been slowing consistently since early-2013 when it was rising by around 20% per year, reflecting the shift away from investment toward services. Industrial production for March also missed consensus expectations (+6% y/y vs. 6.4%), but retail sales beat expectations (+10.1% y/y vs. 9.7%).
Key Implications
The Chinese economy slowed largely as expected in the first quarter, as seasonal disruptions panned out in line with consensus forecasts. Looking ahead, we anticipate that growth on a year-on-year basis should hold at roughly the same pace before slowing further in the second half of the year, as tightening credit conditions constrain growth. Overall, we continue to anticipate economic activity to advance at a 6.5% pace this year, in line with the target set by Chinese authorities, but notably weaker than the near 7.0% increase from last year.
Tighter credit conditions have resulted in a material slowdown in credit growth. Quarterly growth in social financing to the real economy declined for the second consecutive quarter in 18Q1, helping to stabilize the aggregate debt-to-GDP ratio at an all-time high of about 280%. But, there’s still much work to be done, such as the ongoing elimination of overcapacity in some manufacturing industries (e.g. steel) and the resolution of bad debts more broadly. As such, we anticipate policymakers will continue to maintain a tightening bias in domestic credit conditions this year as they have since the second half of 2015.
Aside from slowing credit growth, the threat of further tariffs against Chinese goods by the U.S. administration together with its WTO complaint on China’s intellectual property violations is acting to keep global and domestic policy uncertainty elevated. Although the only tariffs imposed thus far are those on steel and aluminum with very limited impact on China, an escalation of tensions is likely to delay investment decisions, with global supply chains suffering collateral damage.
