That sighing sound you hear from China… is strategists everywhere cutting their GDP forecasts

That sighing sound you hear from China

Kate Mackenzie

| May 15 09:45 | 1 comment | Share

… is strategists everywhere cutting their GDP forecasts. Last week Standard Chartered’s China economist Stephen Green and his team slashed their 2013 forecast to 7.7 per cent from 8.3 per cent. Their 2014 forecast was cut to 7.5 per cent from 8.2 per cent. Today, BAML’s Ting Lu cut to 7.6 for both 2013 and 2014, from 8 per cent and 7.7 per cent, respectively. It seems that April data has dampened any hopes that the Q1 surprise of just 7.7 per cent growth was due to simple base effects such as a missed leap year day or variations in the Chinese New Year holiday. Here are charts of Green et al’s favoured indicators suggesting that this economy won’t be powering back to 8 per cent levels of growth: What went wrong? Green cites a slow and patchy real estate recovery and pressure on local government investment vehicle cash flows, plus slow land sales outside big cities. BAML’s Lu says that, unusually, the quarter-on-quarter rate will keep rising: To be sure, we continue to expect a recovery of sequential growth; however, we have decided to revise down quarterly year-over-year GDP growth as well as annual growth in 2013E. More specifically, we maintain the view that sequential growth (QoQ, seasonally adjusted but not annualized) could bounce from 1.6% in 1Q to around 1.9%-2.0% in 2Q-4Q this year, but we cut quarterly YoY growth to 7.7%, 7.6% and 7.5% in 2Q, 3Q and 4Q (vs 7.7% at 1Q13) from the previous 8.1%, 8.0% and 8.0% respectively. Interesting, but we’re not sure of the significance of the non-annualised quarter-on-quarter figures; it’s true the non-annualised figures have moved around a lot since they were first published a couple of years ago, but most countries give annualised figures so figures like 1.9 per cent growth probably aren’t going to float many people’s boats. Lu however argues that the focus on the year-on-year figures might leave investors overly spooked and, in turn, lead to a more bullish tone if/when the focus shifts. We’re a little more sceptical that the favoured data points change any time soon, considering China’s main quarterly GDP growth number is already quite unusual. Another bullish theory was that the surge in credit growth, particularly in March, might just take some time to generate more growth. Credit data for April however showed that even if that’s the case, it’s not a sustained surge anyway:  Finally, the chance of a renewed stimulus push looks ever less likely (not that many pundits have been openly expecting this anyway). From Bloomberg News: “To achieve this year’s targets, the room to rely on stimulus policies or government direct investment is not big — we must rely on market mechanisms,” Li said in a May 13 speech broadcast to officials around the country, according to a transcript published last night on the central government’s website. Relying on government-led investment for growth “is not only difficult to sustain but also creates new problems and risks,” he said. Incidentally, Green says big stimulus is unlikely unless unemployment begins to look like a problem. Makes sense.