Economy Watch | China

The Economy Stabilized in August but Outlook Remains Weak

September 27, 2023

Trusted Insights for What's Ahead™

• Status of China’s Economy – China started Q3 with a worse-than-expected economic downturn. While this downward momentum appears to have stabilized in August, it is still too soon to tell whether this will lead to a sustained turnaround. Despite policy support picking up speed, we don’t think this is enough to drive a rapid improvement in confidence levels. And we don’t expect to see a big stimulus package either, as authorities are concerned about exacerbating structural imbalances. We currently forecast that China will expand its economy by 4.8 percent in 2023.
• Investment Trends – Growth in fixed asset investment (FAI) stabilized in August. Although further front-loading of local government bond issuance is boosting infrastructure investment, this is being offset by further declines in real estate investment. Moreover, ongoing weakness in external and domestic demand, and the impact this is having on profit margins, is ultimately going to discourage manufacturing firms from investing further. Without a sustained turnaround in the real estate sector, aggregate growth in FAI is unlikely to see a major upturn.
• Consumption Trends – Retail sales improved in August. Sales of goods, especially auto sales, picked up, while residential housing sales continued to fall. Looking ahead, it will be difficult to maintain the August consumption growth momentum as households remain cautious due to the ongoing property downturn and weakening job market.
• Trade Trends – Growth in Chinese exports rebounded in August but remained in negative territory. The uptick is largely due to the base effect rather than an actual improvement in external demand. The manufacturing PMI’s new export orders subindex remains well below the 50 points mark for the fifth consecutive month, so we see little short-term upside for exports. With high interest rates in many global economies, external demand will likely get worse before getting better.
• Implications for Business – Although a positive sign, we suggest caution when it comes to interpreting the uptick in the August economic data. The various supportive measures the government has rolled out in recent months are starting to put a floor under economic growth, preventing it from sliding further. But the steps taken so far are not enough to turn the tide quickly, and this is likely to continue being the case because of authorities’ concerns about exacerbating structural imbalances. This means that China’s economic recovery will remain a protracted process.