China's Economy Beats Expectations
The global economy has experienced a run of positive news in recent weeks, the latest of which was the stronger-than-expected performance by the Chinese economy over the first three months of this year. China’s strong performance, coupled with positive news emanating from other leading economies, is raising hopes that the five-year run of sluggish growth for the global economy might be coming to a long-awaited end.
Not long ago, the Chinese government lowered its economic growth target for 2017 to 6.5%, a move that signaled to many that the Chinese government was growing increasingly concerned about the prospects for their country’s economy and the risks it faced. However, at least for the first quarter, these fears were not realized. In addition, there were other positive economic results from China in recent weeks, signaling that the uncertainty that has lingered over the Chinese economy over the past two years has dissipated. However, this uncertainty has not completely disappeared, as the outlook for China over the remainder of this year is mixed.
During the first quarter of 2017, the Chinese economy expanded by 6.9% on a year-on-year basis (1.3% quarter-on-quarter), the higher rate of growth for the world’s second-largest economy since mid-2015. Last year, the Chinese economy grew by 6.7% for the year, the lowest annual rate of growth in China in 26 years and a far cry from the 14.2% GDP growth recorded in China a decade ago. However, it is important to note that China’s 6.7% GDP growth last year contributed more to global economic growth than did 2007’s 14.2% as a result of China’s vastly larger economic output today.
Once again, government spending on infrastructure remained a major driver of growth in China in early 2017. Furthermore, the country’s real estate sector continued to grow at a rapid (and disconcerting) pace in the first quarter. Finally, consumer spending continued to become a more important component of the Chinese economy, with retail sales growth remaining above 10% during the first three months of the year.
With the Chinese economy beating expectations and with the United States economy likely to gain momentum this year, the world’s two largest economies are providing a major boost for the global economy. Add to this the fact that Europe is benefitting from a weak-currency-driven export boom, while many emerging markets are beginning to pull out of their recent slumps, and the outlook for the global economy is brighter than at any time in recent years.
As far as China is concerned, the fact that consumer spending continues to grow at a rapid pace, even as credit growth has begun to slow, is a sign that the transformation of China into a more consumer-driven economy is proceeding. Meanwhile, the improving economic situations in many of China’s leading export markets is raising hopes that the deep slump experienced by many Chinese exporters over the past two years is finally coming to an end. With domestic and external demand rising, growth rates in China have the potential to remain near current levels in the months ahead, provided that China can avoid some of the pitfalls that it faces on the economic front.
In fact, while much of the economic news out of China in recent weeks has been quite positive, the Chinese economy continues to face a number of risks that could result in slower economic growth rates in the coming months. First, debt levels remain dangerously high as China’s combination of public- and privately-held debt is now at the level of much more developed economies, and is continuing to rise at a dangerous pace. Second, over-capacity remains a major threat to a number of China’s leading industries and little has been done about this issue in recent years. Third, China’s real estate sector is growing at such a pace that the threat of overheating is now a very real concern and this could produce a market bubble that threatens the entire Chinese economy. Finally, while export demand is rising once again, China’s export competitiveness is beginning to decline as labor costs rise and as new competitors emerge.
With these risks in mind, it is easy to understand why the Chinese government has been putting so much effort into tempering expectations for the Chinese economy in 2017. Nevertheless, the positive results in the first quarter of this year could spur faster growth, or, if the key risks facing the country are ignored, they could lead to a significant slowdown in the months ahead.