What to Watch in China GDP Report: Investment, Trade and Savings

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China’s economic expansion probably slowed further in the third quarter, weighed down by the trade war and government efforts to pivot growth from over-reliance on investment and debt.

With the headline GDP figure due Friday morning in Beijing likely to again show the uncanny gentleness of China’s long slowdown, you’ll need to get under the hood to get a better look at what’s really happening. For the record, economists surveyed by Bloomberg expect the economy expanded 6.1% from a year earlier in the third quarter.

As for the monthly readings, forecasters expect data on fixed-asset investment to show growth held steady in the nine months to September, while growth of industrial production and retail sales probably ticked higher.

What Bloomberg’s Economists Say...

We expect September’s activity data to show a further loss of momentum after weak data in July and August. Industrial production likely remained sluggish, with retail sales growth continuing to slow on deteriorating consumer sentiment. Investment might have stabilized on increased spending on infrastructure.

-- David Qu and Chang Shu, Bloomberg Economics

For the full note click here

For a granular look at what’s going on in the world’s second-largest economy, here’s what to watch in the reports:

Investment

Manufacturing in China is struggling, and even though it improved in September, the official purchasing manager indexes still show a contraction both overall and in new orders. The trade war and weak global trade are partly to blame, but the government and central bank’s efforts to control debt are also having an effect by making it harder for companies to get access to credit. Growth in factory investment is on track for the weakest year since at least 2004.

Infrastructure investment had been seen as a potential source of new demand, with policy makers encouraging local governments to sell more bonds to pay for roads, rail and other projects. However, even with a run-up in that debt, it hasn’t boosted investment growth much yet. The local government quota for these sorts of bonds is basically filled for this year, so without an increase in the quota or some other measure, this may look even worse in the final quarter of the year.

Trade

Surprising as it may sound, trade had actually been a strong contributor to growth in the first half of the year. That’s because imports were declining and companies were rushing to export quickly before a possible increase in tariffs. In the third quarter, both sides of China’s trade have slumped, so it will be important to watch the contribution to growth from net exports. A drop in the net contribution will mean that the economy is relying even more heavily on domestic consumption and investment -- two areas which have been weak so far this year.

Savings

China’s government is looking to households to increase spending and consumption to drive a re-balancing of the economy away from its investment and export focus. On an absolute basis, private consumption is about 38% of GDP, well below the global average of around 60%, according to the International Monetary Fund.

The IMF estimates that the household savings rate is still as high as 46% of gross domestic product, noting that “the flip side of high savings is low consumption.” While some have called that estimate too high, it’s looks like households are holding back more of their income, with retail sales growth lackluster and car sales slumping over the past year and a half.

Deflator

This reading of economy-wide inflation should give an idea of what’s happening to prices beyond the impact of the recent swine fever outbreak. The GDP deflator-- the difference between the headline growth rate (adjusted for inflation) and the nominal growth rate (unadjusted for inflation) -- usually falls somewhere between the consumer price index and the producer price index. The data matters because if sustained price declines return, then the central bank will likely be more willing to increase stimulus. While consumer prices are rising on the back of a jump in pork costs, there’s not much the government is able to do about that in the short-term, and so it will focus more on what’s happening with companies and more broadly across the economy.

Employment

Even as the economy has slowed and some companies have cut back on output and workers, the official unemployment rate has remained stable. But over the same period, other employment data have been pointing down. If that weakness spreads and appears in the official data, policy makers may ratchet up their stimulus.

To contact Bloomberg News staff for this story: James Mayger in Beijing at jmayger@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Malcolm Scott

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With assistance from Bloomberg