(Bloomberg) — China announced faster-than-expected economic growth in the first quarter – along with some numbers that suggest things are set to get tougher in the rest of the year.
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Gross domestic product climbed 5.3% in the period, accelerating slightly from the previous quarter and beating estimates. But much of the bounce came in the first two months of the year. In March, growth in retail sales slumped and industrial output decelerated below forecasts, suggesting challenges on the horizon.
“Markets may find it hard to be convinced by the strong GDP growth print and difficult to reconcile with the mixed March data,” said Xiaojia Zhi, chief China economist at Credit Agricole. “There could be also concerns that if GDP growth remains above 5% as data suggest, policymakers would be quite comfortable and see no pressure to further ease their policies.”
The world’s second-largest economy has struggled to find a firm footing post-pandemic. Manufacturing is holding up, thanks to overseas demand and Beijing’s focus on developing advanced technologies at home. But a prolonged real estate crisis is weighing on confidence and factory prices have been in deflation for more than a year, reflecting anemic domestic demand and excess capacity in some industries.
The yuan narrowed earlier loss to trade 0.2% weaker in the offshore market, after the People’s Bank of China loosened grip on the Chinese currency with the daily reference rate earlier on Tuesday. It was steady in the onshore market. The yield on the 10-year benchmark government bond was little changed at 2.28%.
Economists at DBS Group Holdings Ltd raised their forecast for China’s annual growth from 4.5% to 5% after the data, bringing that number in line with the government’s annual target. Nathan Chow, senior economist at the bank, cited stronger-than-expected US demand and the improving labor market as reasons for the upgrade. The urban jobless rate eased slightly last month.
The National Bureau of Statistics said the economy “got off to a good start” in the first quarter but cautioned on external risks. “The complexity, severity and uncertainty of the external environment are on the rise,” the NBS said in a statement accompanying the Tuesday release. “The foundation for economic stabilization is not yet solid.”
What Bloomberg Economics Say …
The surprise acceleration in China’s first-quarter growth puts GDP on an early track for this year’s 5% target. The details, though, raise serious doubts about sustainability. The pickup was almost entirely driven by public investment … Under-performance in production and private demand suggest the recovery is on thin ice.
— Chang Shu, Chief Asia Economist
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President Xi Jinping has turned to China’s massive factory floor to reinvigorate the nation’s economy, focusing on the high-tech and green energy sectors. While data from early 2024 showed an industrial upswing, disappointing output figures in March cast doubt over the ability of booming sales abroad alone to offset weak demand at home.
“There is a lack of domestic demand, that’s going to be a challenge,” said Philipp Hildebrand, vice chairman at BlackRock Inc., noting that deflationary pressure was another major “problem.” The value of Chinese exports fell in dollar terms last month, as lower prices hit producers.
China’s manufacturing drive has also exacerbated tensions with major trading partners, with US Treasury Secretary Janet Yellen and German Chancellor Olaf Scholz both traveling to China this month to scold top officials on what they see as a deluge of cheap exports to their markets.
Once seen as an ambitious target, most economists agreed the strong quarterly data put now the official about 5% growth goal well within reach. But they warned policymakers still need to take more action to stabilize the property market, and encourage consumers to spend.
Investors are closely watching one major government effort to boost domestic demand: a trade-in program that will encourage businesses to upgrade their machinery and households to buy new cars, refrigerators or washing machines. Shares of Chinese home-appliance makers jumped last week after officials vowed “strong” fiscal support for the plan.
Monetary policy support is likely to be constrained by the strong US economy. With an imminent US Federal Reserve cut looking less likely, the chances of China’s central bank easing rates is also “diminishing,” according to Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, although he added that the weaker yuan fixing Tuesday indicated some flexibility.
“Exports is the key driver for the economy, hence more flexibility in the exchange rate is desirable,” he added.
–With assistance from Winnie Hsu, Iris Ouyang, Rebecca Choong Wilkins, Josh Xiao and Wenjin Lv.
(Updates with more analyst comments and context.)
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