A worse-than-expected third quarter economic performance for China has indicated there could be more pain ahead in the final three months of the year, while stoking fears of “stagflation”, analysts say.
On Monday, new data from the National Bureau of Statistics showed China’s gross domestic product (GDP) for the three months ending September grew by 4.9 per cent from a year ago, missing market expectations of 5 per cent growth and well below the 7.9 per cent gain seen in the second quarter and the blistering 18.3 per cent expansion between January and March.
While growth was extraordinarily strong in the first six months of the year due to a post-pandemic rebound, the underwhelming third quarter gain came amid a power crisis, Delta variant outbreaks, disasters such as floods and Beijing’s regulatory crackdown on various sectors of the economy.
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“In terms of absolute economic growth rate, the fourth quarter of this year and the first quarter of next year might be a bottom of the current economic circle,” said Zhou Hao, senior emerging markets economist at Commerzbank AG, adding he expected China’s GDP growth rate to decline to about 3 to 3.5 per cent in last three months of the year.
Lu Ting, chief economist at Nomura, estimated China’s economic growth would slump to 3 per cent in the fourth quarter and remain that way into spring.
Slower global economic growth would add headwinds to China’s foreign trade and therefore output and GDP growth, Xu Yating, senior economist at IHS Markit, said in a note on Monday.
Other NBS data on Monday offered little optimism.
China’s industrial production disappointed the market by only growing 3.1 per cent from a year earlier in September, falling from a 5.3 per cent rise in August and failing to meet the forecast 3.9 per cent.
The sharp slowdown was partly driven by China’s factory gate inflation, which rose to a record high of 10.7 per cent last month, mostly fuelled by soaring coal prices. For many smaller manufacturers, production is no longer economically viable.
“Since the beginning of this year, international energy prices have risen significantly, the price of natural gas and crude oil has repeatedly reached record highs, and the domestic supply of electricity and coal is tight,” Fu Linghui, a spokesman for the NBS, said at a press conference on Monday.
“A variety of factors have led to power rationings in some places recently, which has had a certain impact on normal production.”
At the same time, Monday’s figures showed China’s raw coal and coking coal output declined by 0.9 per cent and 9.6 per cent from a year ago in September respectively, triggering another round of price increases for both thermal and coking coal futures.
Fixed asset investment – a gauge of expenditure on items including infrastructure, property, machinery and equipment – grew by 7.3 per cent in the January-September period compared with a year earlier. This was lower than the January-August period when fixed asset investment was up 8.9 per cent.
There was one silver lining in retail sales, which rose 4.4 per cent last month, up from the 2.5 per cent gain in August, and above the estimated 3.5 per cent rise from analysts in a Bloomberg survey.
The overall economic picture has ignited concerns about stagflation, which occurs when an economy is hit by slow growth, as well as high inflation and unemployment.
Some economists have raised the spectre of possible 1970s-style stagflation similar to that seen in the United States, when commodity prices soared and supply chains slowed, followed by periods of interest-rate hikes and recessions.
“The third-quarter data showed further signs that the risk of stagflation is rising,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management
“Yet, the unemployment rate declined, which is puzzling,” he said, adding that could help the economy avoid stagflation for now.
Instead, China might drift into a state of “quasi-stagflation” in the final months of the year, marked by high producer price inflation and moderate consumer price increases, but low economic growth, said Shen Xinfeng, chief macro analyst at Northeast Securities.
“Under such a situation, we believe China’s monetary policy would be caught between a rock and a hard place to some extent in the fourth quarter,” she said.
That might explain Beijing’s reluctance to loosen monetary and fiscal policies to generate more economic activity, although that could also mean the fourth quarter economic performance will slow down further, Zhang added.
Following the release of the NBS data, Yao Jingyuan, the special research fellow at the Counsellors‘ Office of the State Council, said policymakers did not have to worry about a stagflation.
“China will not have high inflation or hyperinflation, we do not have the basis or conditions,” he told a press briefing.
Instead, he argued the country might need to consider how to stabilise the household prices with pork prices still falling, and the low consumer price inflation gave China space for more monetary easing.
He expected the central bank could cut the reserve requirement ratio by 1 percentage point in the fourth quarter.
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