Fathom’s underlying measure of economic activity in China, the CMI 2.0, slowed to 4.1% in the twelve months to September, nearly a third less than the official measure of 6% growth in Q3.
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As we demonstrate in our latest Global Economic and Markets Outlook, China’s economy has slowed by more than can be attributed to the drag from trade tensions alone. This is a consequence of structural issues at home, such as the reliance on the old-growth engine powered by manufacturing and investment, combined with a struggling domestic environment. Evidence of this is highlighted in shadow measures of consumer expenditure, which we believe to more reliably predict consumption patterns within China. The measures suggest that the Chinese authorities’ aim of rebalancing towards a more consumer-led economy is not succeeding.
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At the same time, private sector firms, which we assume to be an important component of ‘other’, the red line in the chart below, have slashed investment; this together with weaker consumer expenditure points to substantially weaker growth in activity across the economy as a whole.
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Chinese authorities have responded by increasing government investment and subsidies. That fiscal loosening has averted an even sharper slowdown in growth, but it has come at the expense of the general government fiscal balance, which nosedived to -4.8% of GDP in 2018. However, the increase in public investment has not been on a large enough scale to fully offset the decline in investment by private firms, with total fixed asset investment continuing its downward trajectory, falling sharply by 6.7% in the twelve months to October.
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The Chinese economy has been plagued by overcapacity, mainly as a consequence of its old model of growth, in which excessive investment was pumped into the economy. One tactic is to export some of the spare capacity to China’s trading partners. But even with this policy action, China still faces an environment of excess capacity, and thus falling investment could be viewed as a positive development, or at least an unsurprising one, with businesses responding to diminishing marginal returns. However, the simultaneous downturn in consumption is not desirable. A downgrade to growth is the result.
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