Chinese GDP Slows In Second Quarter But Matches Estimates As Lower Inflation Boosts Figures

In a sign that the world economy has yet to find its footing, China, the world's second largest economy, reported that output slowed in the second quarter. However, other key economic indicators including industrial production and fixed asset investment dropped faster than expected and inflation came in below forecasts.

GDP Slows

For the second quarter of 2013, China reported that GDP rose at 7.5 percent rate, in line with forecasts but below the 7.5 percent rate seen in the first quarter. "We were a little surprised by the data, as it seemed to indicate that the spikes in SHIBOR and the much tightened credit conditions in June had little impact on production and investment," said Dong Tao, Economist at Credit Suisse. "Certainly, more impact could surface in July, but still, given that banks lent out very little in the second half of June, infrastructure investment and inventory rebuild seemed to have slowed down, in our observation."

In the second quarter, the economy grew 1.7 percent from the first quarter, a 7.0 percent seasonally-adjusted rate according to Credit Suisse. GDP growth in the first half of the year was 7.6 percent from 2012, below the rate of 7.8 percent seen in 2012.

"The good news is that income growth remained robust, with the urban population seeing a 9.1% year-to-date income increase in nominal terms and 6.5% in real terms," continued Tao, "while the rural population saw 11.9% and 9.2% in nominal and real income growth, respectively, during 1H13. That lifted retail sales by 12.7% in nominal growth and 11.4% in real growth for 1H13 and 13.3% (nominal yoy) and 11.7% (real yoy) for June."

Société Générale's Wei Yao was cautious on the data, noting that nominal GDP was lower than forecast and that inflation came in below expectations, boosting nominal GDP to in-line levels. "Nominal GDP growth decelerated much more sharply from 9.6% in Q1 to 8%, as the deflator increased just 0.5% yoy (1.7% yoy in Q1). We find this deflator somewhat too low given the monthly inflation data published over the quarter."

Other Data

Industrial production in June was reported as weak as well overnight as industrial production growth slowed to 8.9 percent from 9.2 percent in May, below forecasts of 8.1 percent growth. Meanwhile, retail sales grew 13.3 percent in June compared to the 12.9 percent reading in May on expectations of a flat reading and fixed asset investment growth cooled to 20.1 percent vs. the forecast of 20.2 percent for the first half of the year.

"The good news is that income growth remained robust," continued Tao, "with the urban population seeing a 9.1% year-to-date income increase in nominal terms and 6.5% in real terms, while the rural population saw 11.9% and 9.2% in nominal and real income growth, respectively, during 1H13. That lifted retail sales by 12.7% in nominal growth and 11.4% in real growth for 1H13 and 13.3% (nominal yoy) and 11.7% (real yoy) for June."

"The government emphasised two points about this set of data: 1) the major economic indicators are within the expected ranges; and 2) the moderation in growth is a result of pro-active structural adjustment. In other words, Beijing does not believe that the current growth momentum is threatening the bottom line of its policy growth target, perceived around 7.0% yoy by China watchers. That seems to imply that Beijing is in no hurry to boost growth."

Tao also notes not to expect any new expansionary monetary policies as the new regime looks set to allow the markets to fully adjust and make China more competitive in the long-run.

"Still, we believe that growth momentum is probably weaker than the headline suggested and could weaken further amid tightened liquidity conditions. Should that scenario play out, with modest growth deceleration, we would expect some form of policy reaction, including providing additional liquidity to local governments in late summer, as the country embraces the third plenary session of the party congress in October, though the scale would not likely be in comparison to what was launched in 2009. We have no plan to revise our growth forecast, currently standing at 7.4% for 2013."