Instant View: China’s economy grew 4.5% year-on-year in Q1, above expectations

(Reuters) – China’s economy grew at a faster-than-expected clip in the first quarter, official data showed on Tuesday, expanding 4.5% year-on-year, as policymakers move to bolster growth following the end of strict COVID-19 curbs in December.

Analysts polled by Reuters had expected gross domestic product (GDP) to expand 4.0% from a year earlier, quickening from 2.9% in the fourth quarter.

On a quarter-by-quarter basis, GDP grew 2.2% in January-March, data released by the National Bureau of Statistics showed, compared with expectations for a 2.2% increase and a revised 0.6% rise in the previous quarter.

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Key points

* Q1 GDP +4.5% y/y (f’cast +4.0%, Q4 +2.9%)

* Q1 GDP +2.2% q/q s/adj (f’cast +2.2%, Q4 revised +0.6%)

* March industrial output +3.9% y/y (f’cast +4.0%, Jan-Feb +2.4%)

* March retail sales +10.6% y/y (f’cast +7.4%, Jan-Feb +3.5%)

* Jan-March fixed asset investment +5.1% y/y (f’cast +5.7%, Jan-Feb +5.5%)

* Jan-March property investment -5.8% y/y (Jan-Feb -5.7%)

MARKET REACTION:

There was mostly muted reaction to the data in Chinese stock markets and the yuan currency.

COMMENTARY:

TAO CHUAN, CHIEF MACRO ANALYST AT SOOCHOW SECURITIES, BEIJING

“Consumption data is strong, showing demand is picking up, and the gap between supply and demand is narrowing. Riding on this trend, we expect GDP in the second quarter to reach around 8%, and it won’t be a big problem for China to achieve its growth target for the year.”

“That said, we see some structural problems remain in unemployment rate, property investment and confidence in private sector. These problems need to be solved to support a sustained recovery.”

CARLOS CASANOVA, UBP, ASIA SENIOR ECONOMIST, HONG KONG

“Data shows that the uneven recovery trend in China is more extreme than expected. Retail sales were stronger than expected but caused by consumption of services in the first quarter. The core CPI data released seven days ago was subdued so that demand for goods is lukewarm.”

“Strong Retail sales trend would continue in the second quarter due to low base effect last year when China was still under COVID-19 restrictions, so consumption led growth in first half especially growth in services would sustain,”

“But the export would still be a drag for the overall recovery in 2023. Export demand will be weaker this year due to the trend we are seeing from external demand over past 3 years… supply chains which had concentrated in China has now begun to move to other Asian countries. This reshuffling in supply chain is coinciding with weaker demand from the U.S. and EU, so export would be a drag.”

BRUCE PANG, CHIEF ECONOMIST FOR GREATER CHINA, JONES LANG LASALLE, HONG KONG

“The data suggests that the economic recovery is building momentum, which is lifted by strong consumption and stabilised manufacturing activity and investments.”

“Markets will continue to monitor whether the economic recovery is sustainable, comprehensive and balanced.”

“I still don’t think chances for an interest rate cut are high for the time being, considering the pace and situation of the economic recovery.”

ALICIA GARCIA-HERRERO, CHIEF ECONOMIST, ASIA PACIFIC, NATIXIS, HONG KONG

“Consumption seems to be doing better. The 10% retail sales (growth) looks amazing, but it is not really so amazing because the base effect is huge.

“CPI is very low, which doesn’t really match the surge in retail sales, especially services. Service CPI growth has been very low, and I think there is a lot of prices that are being administered.

“I think the reason is China wants a recovery that is not inflationary, because disposable income has not been growing fast for years and they don’t want to see real disposable income being dented by inflation.”

WANG DAN, ECONOMIST, HANG SENG BANK, SHANGHAI

“The headline GDP figure is very eye-catching.”

“I don’t think consumer inflation will pick up as domestic demand remains tepid. The pace of residents’ income growth is slower than interest payments. And, residents’ savings have reached a historic high. Both figures suggest people are not so willing to purchase houses or consume.”

“In this case, interest rates should be lowered.”

JARROD KERR, CHIEF ECONOMIST, KIWIBANK, AUCKLAND

“There is an element of reopening and a bit of excitement around that, and we really do need to see how the economy performs over the second half of this year.

“China will probably be lucky to hold on to the current run rate, and we’re likely to see a slowdown in growth, I think, over the second half of the year.”

ZHANG ZHIWEI, CHIEF ECONOMIST, PINPOINT ASSET MANAGEMENT, HONG KONG

“Economic recovery is well on track. The bright spot is consumption, which is strengthening as household confidence improves. The strong export growth in March also likely helped to boost GDP growth in Q1.

“Leading indicators such as credit growth indicates economic momentum will continue to improve in Q2. I continue to expect growth to surpass 6% this year.”

WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE

“Headline data was very strong, and underlying it you can see it was mainly led by private consumption….there is room for better growth this year. In the second-quarter, we have a very low base, so it’s possible for another outperformance and strong growth.”

“There is also some expectation for an upturn in the electronics sector and global demand, which could also help the economy to grow. The retail sales number has been improving… and accelerated in March. It shows that the momentum of the reopening has continued into March, which is something positive. Private consumption will drive China’s growth this year.”

XING ZHAOPENG, SENIOR CHINA STRATEGIST, ANZ, SHANGHAI

“GDP data beat market expectations, and it was mainly lifted by services sector due largely to pent-up demand and low base effect.”

“From the perspective of growth momentum, the industrial output and fixed asset investment figures are not good, and insufficient domestic demand should remain the major obstacle.”

“Second-quarter GDP is likely to improve due to low base effect, but the economic growth will slow down significantly in the second half of the year.”

“The pattern of stagflation in the second half of the year remains unchanged. The faster the rebound, the higher the consumer inflation.”

REDMOND WONG, GREATER CHINA MARKET STRATEGIST, SAXO MARKETS, HONG KONG

“The higher-than-expected GDP and retail sales prints are positive in supporting the notion of a solid near-term path to recovery following the reopening. We are positive on the consumer and technology space, including mega-cap China internet names.”

MATT SIMPSON, SENIOR MARKET ANALYST, CITY INDEX, BRISBANE

“On net, that’s a decent set of figures out from China in Q1, which keeps them on track for their growth target of around 5% this year.”

“It has helped lift sentiment to a degree in Asia… but the slightly lacklustre response suggests there are some lingering concerns that Q1 data is the initial thrust thanks to the reopening, and that its momentum could fade in Q2 or Q3.”

CHRISTOPHER WONG, OCBC, CURRENCY STRATEGIST, SINGAPORE

“On balance quite an encouraging report, with retail sales, GDP and property sales coming in higher than expected…reinforces the story that recovery momentum post-pandemic remains intact.”

MARCO SUN, CHIEF FINANCIAL MARKET ANALYST, MUFG BANK (CHINA), SHANGHAI

“High-end consumption gives us a bit surprise but overall weak recovery story remains intact.”

“Should overall consumption weakens in Q2, the PBOC may consider mildly cutting policy rate one time. It is data dependant.”

BACKGROUND:

* China’s economy is expected to grow 5.4% in 2023, according to a Reuters poll of analysts. Last year, it grew 3.0% in one of its worst performances in nearly half a century due to strict COVID-19 curbs.

* The world’s second-largest economy is staging a gradual but uneven recovery, led by consumption, services and infrastructure.

* However, slowing inflation and surging bank savings raise doubts over the strength of a pick-up in domestic demand.

* Policymakers have pledged to step up support for the economy, which is rebounding after disruptions caused by a sudden lifting of COVID-19 curbs in December.

* Policymakers will likely rely on a mix of modest monetary easing and infrastructure spending, alongside efforts to bolster the property sector.

* The government has set a modest target for economic growth of around 5% for this year, after badly missing the 2022 goal.

* China’s exports unexpectedly surged in March, but analysts cautioned the improvement partly reflects suppliers catching up with unfulfilled orders after last year’s COVID-19 disruptions.

(Reporting by Asian bureaus; Compiled and edited Rashmi Aich)