According to Fathom’s China Momentum Indicator (CMI), China’s growth slowed slightly in July to 6.6%, having peaked at the end of last year close to 7%. The slowdown reflects weaker growth in credit and in retail sales, with most of the other components of the CMI holding up.
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This is ‘old-model’ growth: lots of heavy materials being shifted around the economy; lots of commodities being used in infrastructure investment; weak currency supporting exports; consumption squeezed through tighter credit conditions. China abandoned the ‘new model’ (rebalancing towards the consumer) at the end of 2015 after a half-hearted attempt to adopt it resulted in a sharp slowdown. Back then, the share of goods imported in China that were consumer-focused peaked at close to 18% — it is now around 15%. Moreover, the pace of annual growth in real retail sales of consumer goods — one of the ten components of our CMI — reached a record low in July of this year, according to data published by the National Bureau of Statistics of China. To successfully rebalance China’s economy, aggregate demand needs to keep growing at or above its current rate. And, within that, the share of consumer spending in GDP needs to increase dramatically — implying that consumption growth has to run significantly ahead of GDP growth. The tactics currently being deployed by China’s policymakers will not lead to this outcome.
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In House
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Not In House
Doubling down on the old model brought growth back up to target, but that is a much smaller impact than the same policy had after the global recession: the old model is exhibiting diminishing marginal returns. China’s growth has peaked, and we expect real growth to slow by more than the government’s official forecasts imply. In our latest Global Economics and Markets Outlook (GEMO) for 2018 Q3 we forecast China’s economy to slow in 2019 to 5.9% and to slow sharply in 2020 to around 3.0%.
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