China Q3 GDP: A Warning for the Global Economy

On Wednesday, China will release a trove of economic data, including industrial production, unemployment, and fixed asset investment. But probably the most important data for the currency markets will be the release of its third quarter GDP figures. China is the first major economy to report how much growth it experienced over the last three months, and could be looked at for clues to how the global economy is going.

As the world’s second-largest economy, China had been forecast to lead growth for the world this year. But, that has shifted substantially, and now the US is seen as the major outperformer. Last week, the IMF released its regular global economic forecasts for this year, and once again cut its growth expectations for China to 5.0%, down from the 5.2% that it had previously forecast. That is still, however, in line with the official target set by the Chinese government for this year’s growth.

The Downward Trajectory

The IMF also cut its outlook for China’s growth in next year, seeing it only managing 4.2% instead of the 4.5% that it had previously expected. The report said that unless the country takes “forceful action” to address the real estate sector, then the economic situation could become worse.

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The housing sector is getting most of the headlines to explain China’s woes. But it is also facing other challenges, such as high unemployment, capital flight that has led the currency to drop to 16-year lows, and the threat of deflation. The PBOC is in an increasingly challenging position, as it has to ease to support the domestic economy, but also not undermine the currency too much as other central banks tighten to deal with inflation.

What the Forecasts Say

China’s economy is expected to accelerate a bit in the third quarter, growing at 0.9% compared to 0.8% in the second. But when compared to last year, the annual rate is expected to experience a marked slowdown to 4.6% from 6.3% prior. We have to remember that last year at this time, the economy was in difficulties as the country was facing rolling lockdowns to stave off a surge in covid cases. And typically the third quarter sees better performance as Chinese factories ramp up production for year-end sales in its export markets.

Speaking of manufacturing, China’s September industrial production is expected to slow to 4.3% annual growth from 4.5% prior. Analysts point to slowing demand as a factor, despite the weak currency. Which has elevated worries of global economic stagnation as China sees its trade contract by double-digits, along with other major economies such as the US and the EU.

Going Beyond China

Aside from the impact on the Yuan, forex traders will be keen to see what the data barrage will do for the currencies of major trading partners of China. Exports of iron ore have remained resilient, however, which has helped support the Aussie. Domestic demand is also seen steady enough to support the Kiwi. In fact, retail sales in China are expected to pick up their pace, growing at 4.7% in September compared to 4.6% prior.

However, those trends might shift if China’s economy doesn’t outperform expectations. And a disappointment in the data could send investors fleeing for safe havens. Meanwhile, the PBOC is expected to meet later in the week and potentially announce new stimulus measures.

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