Sentiment hits the wall

Decent data, but rock-bottom sentiment tells another story

• Economic activity has been improving since the cyclical nadir in April, and economic data is consistent with 4.5%-5.0% GDP growth for Q3:22.
• However, high-frequency macroeconomic data remains relatively weak, at well below trend. Furthermore, eight (out of the 15 headline monthly macro data points we monitor) deteriorated in August versus July, after nine did so in July and three had stumbled in June.
• August’s data was flattered by a low comparative base. In terms of m/m momentum, many of the “improved” data points slowed in August. Even fixed asset investment in August, buoyed by policy, supported gains in infrastructure spending, was the lowest since February, a full 30% less than in June.
• This lacklustre economic performance is both a cause and consequence of depressed public sentiment and business confidence due to a troubled property sector and the Covid-zero approach. Still, the policy approach to both these trouble spots implies that headwinds will be persisting.
• Consumer confidence in current and future conditions is at rock-bottom levels not seen in 30 years, having barely budged since reaching record lows in April.  
• A best-case scenario may be economic momentum at current levels for through Q1:23. Due to favourable base effects, it may however exceed 8.0% in Q2:23, thereby achieving any reasonable growth target for 2023. Policymakers would consider that “a win”, especially in view of likely recessions and/or stagflation elsewhere in the world. However, structural challenges will reassert themselves, and GDP growth may drop in H2:23, ending around 3.5% in Q4:23. Beijing realises this.
• In fact, slower nominal GDP growth has been consistently flagged by leadership over the past decade, and this may be further reinforced at the Party Congress.