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China’s 4th quarter GDP: glass half full?

David Dollar's picture

You could read the new GDP data from China as very negative or surprisingly positive.

Here’s the negative story: 4th quarter GDP growth was 6.8% from the year-before, the lowest rate in seven years. Quarterly growth rate peaked near 14% in the second quarter of 2007 and has plummeted since then (Chart 1). The deceleration started in the property sector, which began to weaken early in 2008, and has since been exacerbated by the sharp fall in exports. Seasonally adjusted exports dropped 18% in November, from the month before (Chart 2).

The negative view assumes that these trends will continue and worsen. The industries hit immediately such as exporters and the heavy manufacturing (steel, cement) that depends on construction will release millions of workers, which will have negative spillover effects on all the other sectors of the economy. So, first quarter of 2009 will see even slower growth—some private analysts forecast as low as 2%—and recovery will take a long time.

The negative view sees continuing declines in exports because of the global slowdown and little prospect for real estate recovery soon (average housing price in all Chinese cities fell in December for the first time since these data have been collected). The government’s big stimulus package will start to have some effect by second quarter but it is not large enough to compensate for the declines in exports and real estate. It will limit the depth of the recession but cannot keep China from having a shockingly low growth rate of 4-5% in 2009.

On the other hand, I can the see the glass half full. We knew that fourth quarter was terrible for exporters and real estate: yet the economy still managed to expand at a 6.8% rate, which is very high in this global environment. Industrial growth has declined sharply, but primary sectors grew at 7.3% in the 4th quarter, and services at 8.0%. So, we are finally starting to see the desired rebalancing in which the service sectors become the growth leaders. Real retail sales growth was about 17.5% in both November and December. So, the Chinese consumer is a bright spot in an otherwise gloomy global picture. Is that the last hurrah before consumers retrench? Or an indication that consumption can play an increasingly important role in sustaining the growth rate?

The more positive view of China’s prospects holds that 4th quarter ’08 and 1st quarter ’09 will be the trough of the cycle. First quarter ’09 growth will probably be very poor, in the 4-5% range, so be prepared for some dismal numbers. But the optimistic scenario is that the economy begins to accelerate from the second quarter on. The stimulus package begins to have significant effects on construction and hence manufacturing. The optimistic scenario is more likely if the government recognizes the downside risks and substantially increases transfer payments through unemployment compensation, minimum income support, and the rural medical insurance scheme. I have written before that there is a lot of scope to increase public spending on social services and transfers. All of that is important to maintain confidence and to keep private consumption growing. Outside of a few key cities (Beijing, Shenzhen) I don’t think there was too much real estate over-construction. The long-run demographics still favor massive migration to the cities, so with the right policies there is a hope to restart residential construction during 2009.

All of this suggests that there is a lot more uncertainty about China’s growth rate in 2009 than in a normal year. As noted, some private forecasters are projecting 4% or less for the whole year, while others contend that for the whole year China can grow at 7-8%. I am known for being an optimist: I think China can grow at 7% or higher, but it does depend on following the right policies.

Comments

Submitted by All Roads on
David. It is good to see there is someone who has access to an optimistic lens. I have recently been covering this subject quite a bit at All Roads, and one of the concerns I have is just how China will hit this "8%". We have all seen how the numbers can be moved to met policy objectives, and I am sure this will occur again as needed. so, some questions: 1) What is the standard of error for the recent 6.8%? with so much political pressure on local, provincial, and central leaders to hit hit notes, is 6.8% a real figure? 2) In your opinion, where are the biggest gains going to come from? 3) With a large percentage of the investment in infrastructure going to projects that support the foreign economy (either export or inbound FDI), will cities spend their allocation if they know both of those economies are unlikely to pick up in the short term? Or will the money go unspent? R www.allroadsleadtochina.com

Good questions. I too share a concern about whether 8% is possible which is why I have been saying that with the right policies growth can be "at 7% or above." The just-reported 4th quarter y-o-y figure of 6.8% was exactly the median forecast of private analysts surveyed by Bloomberg and accords with my casual empiricism so I have no reason to doubt the number. What I mean by casual empiricism is that people are obviously still out shopping in the malls, and real estate construction goes on outside of a few over-built cities. To keep growth above 7% a lot of the gains will have to come from service sectors, which grew faster than industry in the 4th quarter data. I take your point that infrastructure aimed at the "foreign economy" as you put it will not have much attraction in the near future. But remember, one quarter of the 4 trillion stimulus is for earthquake reconstruction. The other big ticket item is expansion of the passenger rail system, which is not aimed at the export economy. Also a lot of wastewater treatment plants and some urban public transportation. Finally, just yesterday the state council announced 850 billion Yuan program to expand health insurance to cover 90% of the population. I don't think policy-making is done yet, but there are some good features of the spending plans announced so far. To keep up a healthy growth rate will require public investments aimed at domestic needs, more social spending to reduce vulnerability of households and encourage private consumption, restarting real estate construction in most cities, and private investment in response to these new opportunities.

Submitted by Anonymous on
Is Nouriel Roubini (ref recent Bloomberg articles) correct in stating that China's GDP reporting is not in line with US / international practice in that China reports year on year figures rather than annualised, seasonally adjusted quarter on quarter numbers? If Rubini is right, then China is way off 6 - 8% growth in Q4 - instead closer to 0%. Would be very grateful if you could clarify.

Year-on-year growth and quarter-on-quarter growth are both relevant statistics, it is just important to be clear which one we are talking about. China reports its real GDP growth as year-on-year figures. The quarterly data do not go back far enough to allow us to do the seasonal adjustment in a really scientific way, though private analysts make their best effort at it. So, the existing information on quarter-on-quarter growth is best seen as rough estimates. Those estimates basically show flat GDP between Q308 and Q408, as Roubini suggests. I suppose a headline of zero is more catching than a headline of 6.8%, but to me the numbers tell the same story. In the fourth quarter we saw an extraordinary deceleration. The important question now is whether the first Q09 shows that China has reached a bottom and perhaps started to recover, or continues to have worsening economic conditions. Seasonal adjustment is most difficult to do for the first quarter, which includes the major holiday season. So, personally, I am going to be focusing on the year-on-year growth figure. For Q109 the pessimists are talking about 2% or less, whereas the optimists are hoping for a number above 6%. Just about everyone expects that things will improve during 2009 so the growth for the whole year is very likely to be higher than the first quarter number.

Submitted by Robin on
Glad to see a positive view in a sea of negativity. The slowdown appears to be a real opportunity to kick start implementation of government policies to support consumption by improving social service and education delivery, while squeezing incentives to invest in inefficient and enegy-greedy capacity. We have all known that China needs to make this transition but it wasn't clear how to accomplish that when profits were high enough to justify even the most wasteful of capacity additions. When I look at the range of forecasts out there it seems they are hardening into two camps, one which sees China from the outside in and the other that sees it from the inside out. Given the relative insularity of the economy and the signs of renewed activity in services and some of the heavy industrial sectors, I suppose I remain an optimist, seeing growth in 2009 towards the upside of the range.....

Submitted by Anonymous on
I have some questions concerning GDP growth estimates: Does the US report quarterly GDP growth ALSO as year-on-year figures? We know the rate was -3,8 in Q408, but that was annualised rate on quarterly basis. What is the growth rate Q408 vs. Q407? And more confusing data: http://epp.eurostat.ec.europa.eu/.../2-13022009-EN-AP.PDF EUROSTAT provides estimates for US growth both qoq and yoy. But the qoq number is very different that the one published by the US government. Where's the trick here? Thanks in advance!

I agree that the different approaches are confusing, though each has its logic. The US reports very comprehensive data at bea.gov. Its news release highlights seasonally adjusted quarter-to-quarter GDP growth. As you say, the most recent release is the -3.8% growth rate for Q408. The Eurostat report on the US is based on the BEA data but they choose to report it not annualized. So the table in your link says -1.0% for US in Q408, which is the same as -3.8% annualized. The annualization is useful because it tells you how growth would be if it continued one year at the quarterly rate; but it's also a bit misleading because many people read these reports quickly as "GDP fell 3.8% in the fourth quarter" -- which is not correct. GDP fell about one percent in the quarter, which would be -3.8% if continued for a year. Finally, it is easy to figure out the year-on-year from the detailed BEA presentation. For Q408 the number is -0.2% -- this is, fourth quarter 08 GDP was 0.2% less than fourth quarter 07 GDP. That doesn't sound so bad, but can also be a bit misleading in its own way. Hard to remember now, but the US economy actually grew pretty well in the first half of 08. So, between Q407 and Q408 US economic activity first increased, then dropped at a pretty sharp rate in Q408. The result was to leave it 0.2% behind where it was the year before. If explained clearly each of these numbers is useful. But I share your sentiment that press reports are often quite confusing. Hope this helps...

Submitted by Anonymous on
Who has the second largest economy after the U.S.? And what is their GDP in dollars at the end of 2008 in nominal $? Another Q. What was the per capita income for the second largest income in nominal $?

Submitted by Ganzo on
A clear tendency for China was that it gradually became a consumer himself. My only concern was if China were a big enough consumer to weather this crisis. So it seems like you are more on this side, which I pray for. The globe and most economists don't know China as a consumer. So your points about confidence reminded me some interesting ideas. I bet a confidence of Chinese consumer and that of western - stereotype must be different when taking into account all those cultural differences. Yet I guess no reasonable data is available for the sake of profound research. Nevertheless, would it be possible for us to look at Chinese historical accounts to make some conclusion. In that sense I feel we might be closer in estimating Chinese economy.

Submitted by Anonymous II on
There are two main ways to rank economies based on GDP in US dollars. One is to use currency exchange rates to calculate the GDP across countries, whereas the other is to use purchasing power parity (PPP) estimates. Each approach has pros and cons. Your questions center on nominal data. As far as I know there are no GDP rankings data published for 2008 yet. But at the end of 2007 (the last year for which rankings were published by both the World Bank and IMF) Japan remained the second largest economy with a GDP of ca. 4,380,000 dollars. Its population, which has remained quite stable over the last 5 years, was ca. 128 million in 2007. Income per capita is the quotient of GDP/population. Japan's economy contracted in 2008, with the yoy GDP down by 4.6% full year, while that of China still expanded (but rather more slowly than in 2007) by 9.2% in 2008. It is rather difficult to know what is the actual condition of the Japanese and the Chinese economies since things have been changing rather quickly in the past 6 months.

We have good, timely data on retail sales in China, and they show an encouraging commitment to consumption -- real retail sales have continued to grow at more than 10% even as exports and GDP slow down. However, consumption is only half of China's economy so that will not be enough to sustain a high GDP growth rate. I see this as a transitional year in which consumption grows faster than investment and hopefully that starts a trend in which Chinese businesses focus more on the domestic market and greater opportunities for imports from other countries develop as well.

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