Growth softly falls further

Some thoughts on December’s economic data

• Supportive base effects kept GDP growth relatively buoyant, up by 5.2% in Q4:23, from 4.9% in Q3:23. Though worse than expected, this still means that Beijing has met its growth target.
• However, overall economic momentum is far from resilient and, without supportive base effects in 2024, GDP is set to softly fall further this year.
• Nominal GDP growth remains near multi-decade lows – which often determines how businesses and households experience the economy. It likely stayed around 3.5%, having slowed from 4.8% in Q2:23, to 3.5% y/y in Q3:23, which means that the GDP deflator remained in the red.
• Inflation data confirms deflationary trends. China’s Consumer Price Index (CPI) and Producer Price Index (PPI) improved a fraction in December, but both are negative. So, for only a second time in over 30 years, China reported consumer price deflation for the year, well below the government’s target of 3.0%.
• Investment growth expanded by 3.0% in 2024, from 5.1% in 2022, propelled by SOEs (+6.5% y/y), infrastructure (+6.5% y/y), and manufacturing (+5.9% y/y). Importantly, the surge in infrastructure investment growth from 7.1% y/y in November to 8.2% in December this year is notable – but would be near impossible to maintain in 2024. 
• Industrial production figures confirm those same economic drivers. Growth in industrial production accelerated from 3.6% y/y in 2022, to 4.6% y/y in 2023, again led by SOEs (+4.8% y/y in 2023), accelerating to levels not seen since 2018 in the month of December, and lagged by private firms (+2.8% y/y in 2023).
• Doubts continue around manufacturing investment, the largest component of domestic investment, tallying CNY28trn in 2023, and expanding by 6.5%. We are watching inventory levels (now flatlining albeit at elevated levels), profit growth (down each month for two years and down 11.8% y/y YTD through November), and the sector’s debt accumulation (currently borrowing at record amounts).
• Base effects pushed retail sales growth to expand twice as fast in Q4:23 than in Q3:23. However, we expect 2024 household consumption to look much as it did in 2023, which, without base effects, will equate to around 2 percentage points to GDP growth this year. The slowing trajectory for consumption growth implies that, if consumption remains the significant driver for the overall economy, overall economic growth will slide further.
• The credit environment continues to deteriorate. New bank loans growth continued its year-long trend of slowing, but the outstanding stock of bank loans (and total credit) still increased at twice the speed of the economy, exacerbating concerns over efficiency of credit allocation.
• Economic weakness is an ongoing structural story, rather than a cyclical downturn that bottomed out last year. 2024 will prove to be an even greater test of the willingness of policymakers to go beyond the veneer of rebalancing brought about from base effects and permit genuine economic rebalancing and restructuring. Stoking investment, and maintaining the rapid growth in credit, is proving to be less and less impactful.