China confirms its economic slowdown amid the energy crisis and the search for a new model

The fears have been confirmed. The Evergrande crisis (a reflection of the real estate situation), the Delta variant and the energetic crunch they are taking a toll on China’s economic growth. The economy has gone from growing almost 9% annually in the second quarter of the year to growing less than 5% in the third quarter of this 2021. Global markets are watching with concern what is happening in China.

Growth has been below expectations (4.9% of GDP) due to the consensus of Bloomberg which predicted an advance in GDP of around 5.2%. In quarterly terms (growth over the previous quarter), the economy has only advanced 0.2%, compared to the 0.5% expected by analysts. In this way, the country’s growth falls below the trend that had been marking the years prior to the covid.

Commerzbank economists highlight in a comment sent to clients that “clearly, the resurgence of the virus and the energy crisis have weighed on the economic activities of the country. Furthermore, concerns about the real estate sectoror (with Evergrande as the epicenter) they have also affected sentiment and investment in a relevant way “, explain the experts of the German bank.

The ‘Asian giant’ has begun a change of economic model that seeks the long-term sustainability, but that will have a visible cost (in terms of growth) in the short, as can be seen.

Beijing is grappling with an unprecedented energy crisis stemming from cutting emissions to cut pollution, but which has also been exacerbated by the global coal and gas price boom. Several provinces of the country are rationing energy consumption, affecting the production of various industries and, therefore, economic activity as a whole.

At the same time, Beijing is laying the foundations that will lead to a new economic model less dependent on debt and brick. These changes will undoubtedly have significant implications for China and the rest of the world.

“Going forward, policymakers will seek to a new balance between economic growth and financial stability. So while the overall tone is likely to remain tough on borrowing, some marginal relaxation can still be expected to counter strong headwinds for the economy. Conclusion, the slowdown in growth should continue in the coming quarters “, say the experts of the German bank.

The weakening is widespread

Regarding the activity data for September, industrial production advanced 3.1% annually (consensus: 3.8%), compared to 5.3% the previous month, reflecting the damage due to power shortage. Fixed asset investment slowed significantly to 7.3% year-on-year in the first three quarters of this year, from a previous reading of 8.9%.

On the other hand, although retail sales obtained better results than expected with 4.4% per year (consensus: 3.5%), the trend has clearly lost strength, which indicates that domestic consumption is also moderating, as well. as well as household spending.

However, from Commerzbank they acknowledge that “surprisingly, the urban unemployment rate fell below 5% at the end of September, to 4.9% (consensus: 5.1%). However, we must interpret it with caution, since that the data could have very short legs and the age group of 16 to 24 years registered an unemployment rate of 14.6% “.

China and its future

Tommy Wu, an analyst at Oxford Economics, explains that the Asian giant has “various headwinds.” The firm expects supply shortages to ease in the coming months as the Chinese government has stressed the need to secure energy supplies to keep the economy running. The problem, according to Wu, will come from the real estate sector. “Although the problems at Evergrande are unlikely to cause a Lehman moment, we expect them to worsen the slowdown in the sector,” says this expert. In addition, the pandemic continues to take its toll. “It is likely that the caution against covid will continue to hamper the recovery of consumption,” says the consultancy in its analysis.

Given this scenario, Oxford has worsened its forecasts for Chinese GDP for the fourth quarter: it now expects an expansion of 3.6% year-on-year, compared to the 5% it previously estimated. For the year as a whole, he believes that Chinese GDP will grow by 8% (four tenths less than what he previously calculated) and in 2022 he cuts the estimate another four tenths, to 5.4%. From ING Economics they are somewhat less pessimistic: despite lowering their estimates, they anticipate an increase in GDP between October-December of 4.3% year-on-year and 8.9% for the whole of 2021. “If there is no relaxation of monetary policy In the quarter, we should expect GDP growth to slow even more, “says Iris Pang, chief economist for China at the Dutch think tank.

Oxford Economics: “Evergrande Won’t Create a Lehman Moment, But Real Estate Will Get Worse”

Tommy Wu, an analyst at Oxford Economics, explains that the Asian giant has “various headwinds.” The firm believes that supply shortages could be less intense in the coming months as the Chinese government has stressed the need to secure energy supplies to keep the economy running. The problem, according to Wu, will come from the real estate sector. “Although the problems at Evergrande are unlikely to cause a Lehman moment, we expect them to worsen the slowdown in the sector,” says this expert.

Given this scenario, Oxford has worsened its forecasts for Chinese GDP for the fourth quarter: it now expects an expansion of 3.6% year-on-year, compared to the 5% it previously estimated. For the year as a whole, he believes that Chinese GDP will grow by 8% (four tenths less than what he previously calculated) and in 2022 it cuts the estimate another four tenths, to 5.4%.

From ING Economics they are somewhat less pessimistic: despite lowering their estimates, they anticipate an increase in GDP between October-December 4.3% year-on-year and 8.9% for all of 2021. “If there is no easing of monetary policy in the quarter, we should expect GDP growth to decline even more,” says Iris Pang, chief economist for China at think thank Dutch.