China: The worst is over, but don’t get too excited
- China’s third quarter real GDP growth of 6.9% year-over-year (y/y) was weaker than last quarter, as growth from the tertiary (services) industry was unable to offset weakness in the secondary (manufacturing) industry.
- Stable labor market conditions and rising household income should lift consumption in the short-term, but further fiscal and monetary policies are much needed as disinflationary pressure intensifies in China.
- Investors need to accept lower economic growth as the “new normal” for China as the economy continues to rebalance away from the manufacturing sector and into the service-oriented sector.
China GDP better than expected
China’s third quarter real GDP came in at 6.9% y/y, down from 7.0% in the second quarter and the lowest since 2009 (consensus 6.8%). On a quarter-over-quarter annualized basis, the economy expanded at the same pace as the second quarter at 7.4% (Exhibit 1). Despite the slowdown in the headline GDP number and the drag on net exports from underwhelming global economic growth this year, there is evidence that the ongoing rebalance away from a manufacturing driven economy towards a service-oriented domestic demand economy is well underway. The share of tertiary industry in overall GDP rose steadily from 43% in 2006 to 51% in the 3Q 2015, while the secondary industry has declined from 47% to 40%.
All about the tertiary sector in supporting China's growth
Exhibit 1: Real GDP growth by industry, year-over-year % change