China's Economic Growth Falls to a Five-Year Low

Economic growth in China slowed to its lowest level in five years in the third quarter of this year, adding to the concern that the global economy as a whole was in jeopardy of a more pronounced slowdown in the months ahead.  Moreover, this slowdown in China reinforces the notion that China’s role as the leading driver of global economic growth in recent years is coming to a slow, but sure, end.  Given the growing challenges facing the world’s largest emerging market, ISA is forecasting that economic growth rates in China will fall below the 7% level in the near future.

China’s GDP growth rate fell to 7.3% on a year-on-year basis in the third quarter of 2014.  While this was in line with our forecasts, it nevertheless raised concerns about the health of the Chinese economy.  A number of factors contributed to this slowdown, including lower levels of industrial output, a slight deceleration of retail sales growth and the continued weakening of China’s real estate market.  The latter factor has been particularly worrisome, as Chinese housing sales have fallen by 10.8% in terms of revenues over the first nine months of this year.  This has held back the domestic consumer spending growth that the Chinese government had been counting on to offset the lower levels of export growth that have been foreseen for China for some time now.

Looking ahead, a number of threats are facing the Chinese economy and will eventually result in economic growth rates falling to below 7% on a consistent basis within the next 18 months.  First, domestic demand levels will remain relatively weak as the real estate market struggles to grow and as China’s long-term demographic decline begins to have a major impact on the economy.  Second, export demand will remain weak in a number of key export markets, including in Europe and a number of emerging markets.  In fact, the increase in exports seen in recent months has been due to a number of one-off factors and the surge in demand in North America, and is unlikely to be sustained 

This slowdown has prompted renewed calls for the Chinese government to take action to prevent a hard landing for the Chinese economy.  So far, the Chinese government has refused to enact large-scale stimulus measures this year, including the significant interest rate cuts that many economists have called for.  Moreover, even as the economic results for the third quarter were disappointing, the Chinese government has signaled that it can live with lower levels of economic growth as long as there is not a sharper-than-forecast downturn for the economy.  As a result, the government is likely to enact some targeted economic stimulus measures in the coming months, but any across-the-board stimulus programs will not be forthcoming without a sharp decline in economic growth rates.

For the past few years, we have continuously predicted that the Chinese economy would not suffer a hard landing and we continue to forecast a gradual slowdown in China.  This is due to the fact that China has the capacity to continue to record growth both in terms of exports and domestic consumption.  On the export side, weakness in key export markets and the growing decline in Chinese export competitiveness will be offset by strong demand in North America and East Asia, as well as the move upmarket by many key Chinese manufacturing exporters.  On the domestic side, China’s huge domestic market will continue to shield the country from the potential external shocks.  As a result, economic growth rates of between 6% and 7% will be the norm in China in the coming years, a performance that will be envied by most other major economies.