China’s economy is like Tom Brady’s footballs: Deflation may improve performance.
The world’s second largest economy registered an official 6.9% growth rate, in inflation adjusted terms, in the third quarter compared with a year ago, just a smidgen off the government’s official target of 7%.
But in nominal terms, it grew just 6.2%, the slowest top-line growth for the economy since 1999. That is distressing news for anyone in China with a lot of debt, as slow nominal growth makes paying off loans more difficult. With credit still expanding double digits, deleveraging writ large remains a far off dream.
The reason the real GDP figure came in higher than nominal GDP is that the “deflator” that Beijing’s statisticians applied was negative for the second time this year. It was also negative in the first quarter.
It isn’t clear, though, if a negative deflator is warranted. While producer prices are shrinking, consumer price inflation actually ticked up last quarter, averaging 1.7%, compared with 1.3% in the first quarter, when the deflator was positive.
Investors are right to groan about how fast China is really growing. It is probably both unknowable and not all that great. But nor is it completely collapsing. What’s left to discern is the general direction of things.
On that score, China’s old, smog-belching economy continues to sputter. Fixed-asset investment in September grew just 6.8% compared with a year ago, compared with an average of 19% growth over the past five years.
But there are signs other parts of the economy are at least holding up. Car sales grew again last month. The critical property sector continued to see double digit increase in sales. And for the first time in a year, housing starts increased, a sign easier lending conditions are spurring developers to build.
How does China carry on? A two-speed economy, both geographically and sector-wise is one explanation.
The industrial northeast is in recession, while services-driven activity driven by consumers in big coastal cities pick up some slack. Indeed, industrial parts of the economy grew 1.2% in nominal terms last quarter, while services sector growth, which relies on more workers and hence supports the labor market so crucial to policy makers, was up 11%.
The stimulus Beijing injected in response to the summer’s stock market crash hasn’t completely trickled through and may also help support growth in the months again. More infrastructure spending is on the cards. And a cut in the sales tax for cars could boost consumer spending.
But given the challenges of very low nominal growth, China probably still needs more stimulus just to maintain the current anemic level of activity. Investors hardly have a reason to get pumped on China.
Write to Alex Frangos at [email protected]