Tao Wang is the Head of Asian Economic Research and Chief Economist at UBS, and a member of the Board of Directors of the China Chief Economist Forum
We raise our forecasts for exports and real GDP growth in 2024, but lower our forecasts for nominal GDP growth and the RMB exchange rate
GDP growth in the first quarter exceeded expectations
GDP grew by 5.3% year-on-year in the first quarter, significantly stronger than market expectations, and grew by 6.6% quarter-on-quarter on a seasonally adjusted basis, both of which were better than the fourth quarter of last year. However, nominal GDP grew only 4.2% year-on-year in the first quarter. The faster-than-expected year-on-year growth in real GDP was mainly due to the recovery in exports and stronger-than-expected growth in the value added of the service sector. Industrial production, manufacturing investment and infrastructure investment grew relatively solid in the first quarter, but real estate activity continued to be sluggish. In addition, the Bureau of Statistics lowered the quarterly GDP growth rate for the first half of 2023, as well as the historical data on the absolute volume base of fixed asset investment and real estate activity in the first quarter of last year. For March, the high base dragged down the year-on-year growth rate of most economic activity, but the average annual compound growth rate (CAGR) since 2019 shows that zero growth has been broadly stable, fixed asset investment growth has improved, and exports have continued to recover.
Forecast update: Real GDP growth forecasts have been revised upwards and nominal GDP growth forecasts and RMB exchange rate forecasts have been downgraded
In light of stronger export demand and better-than-expected growth in the first quarter, we have raised our 2024 export (in US dollar) forecast to 3.5% from 1.2% previously, and expect net exports to lead real GDP growth by 0.5 percentage points. At the same time, we downgrade real consumption growth to 5.1% from 5.5%, mainly due to the continued negative impact of the property downturn and the still-subdued consumer confidence. We expect QoQ GDP growth to slow in Q2, but we raise our 2024 real GDP growth forecast to 4.9% from 4.6% given Q1 GDP growth that exceeded expectations and exports are expected to strengthen. At the same time, we have lowered our CPI and PPI inflation forecasts for 2024 and correspondingly lowered our nominal GDP growth forecasts from 5.1% to 4.9%. In addition, we adjust the USD/CNY exchange rate from 7 to 7.1-7.2 at the end of 2024, and we see the risk of further weakening of the RMB against the USD in the near term, given the high US interest rates and the strengthening of the US dollar.
The increase in policy support is likely to only come in the event of further weakness in economic data
Since the two sessions, the policy support has been relatively modest, and the real estate policy has been further relaxed recently. However, we believe that the property market has not yet bottomed out and policy support needs to be further stepped up to stabilize property activity. However, further easing is likely to come only after further weakening of economic data and/or the outbreak of a significant credit default risk event. Given the stronger-than-expected economic growth in Q1, we believe the government's willingness to further increase policy support in the near term is low. As a result, we now believe that the central bank may not cut the MLF rate again in 2024, and that there is still room for the LPR to be lowered. In addition, we believe there are downside risks to overall fiscal expansion and infrastructure investment growth this year.
GDP growth in the first quarter exceeded expectations
GDP grew significantly more than expected by 5.3% year-on-year in the first quarter, and the quarter-on-quarter growth momentum accelerated to 6.6% from 4.9% in the fourth quarter of last year (seasonally adjusted quarter-on-quarter annualized growth). Real value added in the services sector rose more than expected by 5.0% year-on-year, but the deflator fell to 0.1% y/y from 0.6% y-o-y in the fourth quarter. The headline GDP deflator was -1.1% in the first quarter, indicating that the economy is still in a deflationary environment. The stronger-than-expected year-on-year GDP growth was partly due to the Bureau of Statistics downgrading historical data on fixed asset investment and some real estate activity for the same period in 2023, which may partly explain the larger-than-expected year-on-year growth of related indicators. Among them, the Bureau of Statistics revised down the absolute base of fixed asset investment by 11% in the first quarter of 2023, and revised down the absolute base of real estate investment and sales area by about 6%.
The high base dragged down most economic activity year-on-year growth in March. The year-on-year growth rate of industrial production and retail sales of social consumer goods (social zero) slowed down, and exports returned to a year-on-year decline. The year-on-year growth in fixed asset investment exceeded expectations, partly due to downward revisions to historical data for the same period in 2023, with relatively solid growth in infrastructure and manufacturing investment, offsetting the drag of continued sharp declines in real estate investment. On a seasonally adjusted basis, we estimate that the month-on-month growth rate of industrial production and social security in March was weaker than that in January-February, and that new real estate starts and area sold in March decreased compared with January-February. The seasonally adjusted area of real estate sales in the first quarter appears to be a slight improvement from the fourth quarter of last year, but it is too early to judge that it has bottomed out. Exports rose 1.5% year-on-year in the first quarter, with stronger real export volume growth, driving GDP growth and underpinning the solid performance of domestic manufacturing activity.
Property activity remained deep in March and the first quarter of the year-on-year decline. Property sales fell 18% year-on-year in March and 21% year-on-year in January-February, while new construction starts fell 25% year-on-year (less than the previous 30% decline, benefiting from a low base). On a seasonally adjusted basis, we estimate that both property sales and new construction starts in March were slightly lower than in January-February. Real estate investment continued to be subdued in March, falling 10% year-on-year, after falling 9% year-on-year. Partly due to the high base, the funds in place for real estate developers in March still fell sharply by 29% year-on-year, and the further implementation of the "white list" mechanism for real estate projects should help alleviate the financial pressure of some developers to ensure the delivery of buildings and support real estate completion activities in the coming months. In the first quarter, overall real estate activity remained sharply lower than the previous year, with real estate sales down 19.4% year-on-year (down 11.5% year-on-year in Q4), new construction starts down 27.8% year-on-year (down 9.4% year-on-year in Q4), and real estate investment down 9.5% year-on-year (down 11.4% year-on-year in Q4). The seasonally adjusted average of real estate sales in the first quarter improved slightly from the fourth quarter of last year, while the area of new construction starts was basically flat, although it is too early to judge that these two indicators have bottomed out and stabilized. Notably, the Bureau of Statistics revised down the historical data for the absolute volume base of real estate sales and investment in the first quarter of 2023 by around 6%, which may partly explain the discrepancy between official statistics and weak sector data.
The high base dragged down the year-on-year growth rate of the zero in March and the first quarter. The year-on-year growth rate slowed to 3.1% in March from 5.5% in January-February, mainly due to the high base and weaker CPI. We estimate that the seasonally adjusted level of real social zero in March is basically the same as the average in January and February, while the official estimate of the Bureau of Statistics shows that nominal social zero has rebounded month-on-month. In March, the five-year compound annual growth rate of the nominal company was 4.5%, unchanged from January to February. In terms of products, the year-on-year growth rate of retail sales slowed down to 2.7% in March from 4.6% previously, and the weakening of automobile sales dragged down the overall growth rate by about 0.4 percentage points. Among the products related to real estate activities, the year-on-year growth rate of sales of building materials and home appliances was generally stable, while the year-on-year growth rate of furniture slowed slightly. Despite the high base, the year-on-year growth rate of travel-related products (such as cosmetics, clothing, sports) is still relatively stable. On the other hand, the high base dragged down the year-on-year growth rate of catering sales and service sales. The year-on-year growth rate slowed to 4.7% in the first quarter from 8.3% in the fourth quarter of last year, while the seasonally adjusted actual zero level improved slightly from the fourth quarter.
The high base dragged down the year-on-year growth of household income and consumption. According to the latest household survey, the year-on-year growth rate of nominal disposable income (6.2% year-on-year, 6.4% in the fourth quarter of last year) and nominal household consumption expenditure (8.3% year-on-year, 9.1% previously) slowed down in the first quarter, both dragged down by a high base. The year-on-year growth rate of real household income and consumption also declined. We calculate the five-year average growth rate since 2019 to exclude the base effect: the compound annual growth rate of real income held steady at 4.8%, while the compound annual growth rate of real consumption expenditure improved slightly to 4.1%, but it is still well below the pre-pandemic growth rate. The official consumer confidence index bottomed out around the third quarter of last year and has continued to improve from historical lows in the past two quarters, but the extent is limited and still low. The household savings rate in the first quarter of 2024 is still 2 percentage points higher than the level of the same period before the epidemic in 2019, but lower than the 3.6 percentage points in the fourth quarter of last year, indicating that consumer sentiment is still cautious and further accumulating excess savings (5.9 trillion yuan in the first quarter of this year). We continue to believe that consumer confidence will remain weak in 2024 and the release of excess savings is likely to be limited (see UBS's latest Consumer Confidence Survey for details).
Overall fixed asset investment grew slightly higher than expected in March and Q1 (4.5% y-o-y and consensus of 4% y-o-y). Infrastructure growth slowed slightly to 8.6% y/y in March, but the CAGR since 2019 has improved, and Q1 was also slightly better than Q4. Although the issuance of local government special bonds in the first quarter was much lower than that of the same period last year, all the 1 trillion yuan of special treasury bonds issued in the fourth quarter of last year have been distributed to local projects. At the same time, the financing of local government financing vehicles may continue to be limited, and local government land transfer fees did not increase in January and February. Manufacturing investment rose 10.3% year-on-year in March and 9.9% year-on-year in the first quarter, stronger than 7.2% in the fourth quarter of last year. However, if the average annual compound growth rate since 2019 is calculated to exclude the impact of base effects, the compound growth rate in the first quarter slowed down compared to the fourth quarter of last year. Fixed asset investment in infrastructure and manufacturing maintained steady growth, partially offsetting the downturn in the real estate sector. Overall fixed asset investment rose to 4.7% year-on-year in March, and 4.5% year-on-year in the first quarter (2.7% year-on-year in the fourth quarter of last year). It should be noted that in March, the Bureau of Statistics once again revised down the absolute base of fixed asset investment for the same period in 2023 by 13%, and has previously revised down the base of 9% from January to February last year (11% in the first quarter as a whole), which partly explains the stronger-than-expected growth rate of fixed assets.
Industrial production slowed year-on-year in March, but improved slightly in the first quarter. Official data showed that seasonally adjusted industrial production edged down 0.1% month-on-month in March, after 10 consecutive months of month-on-month growth. Despite the sharp increase in the base, the value added of the automotive industry still achieved a year-on-year increase of 9.4% in March. The upward trend of the technology cycle and related export orders supported the year-on-year growth of the added value of the communication equipment industry to remain stable (10.6% year-on-year in March and 14.6% year-on-year in January-February). At the same time, raw material production remained weak, with cement production falling sharply by 22% year-on-year (high base effect) and crude steel production falling by 8% year-on-year. Industry data shows that the resumption rate of construction activities after the Spring Festival holiday is significantly weaker than the seasonal trend, which may have dragged down the demand for building materials in March. Nonetheless, the average growth rate of industrial production in the first quarter improved slightly to 6.2% from 6% in the fourth quarter of last year.
The high base dragged exports back to year-on-year declines in March, while their year-on-year growth accelerated in the first quarter. Exports fell from 7.1% year-on-year growth in January-February to 7.5% year-on-year decline in March, with a high base being an important drag, but exports in the first quarter still improved compared with the fourth quarter of last year. Taking 2019 as a baseline, the compound annual growth rate of exports remained solid in March, indicating that the export recovery continued. The year-on-year growth rate of IT exports accelerated to 7.4% in March, supported by strong exports of mobile phones and computers, in line with other data reflecting a further improvement in the technology cycle. On the other hand, exports of consumer goods fell sharply from 20.3% year-on-year growth in January-February to 17.2% year-on-year, partly dragged down by a high base. While the customs data showed that the nominal trade surplus in the first quarter was broadly stable from a year earlier, our estimated real trade surplus (net exports) boosted real GDP growth in the first quarter.
CPI growth slowed to 0.1% in March (up 0.7% y/y in February). The year-on-year slowdown in CPI growth was mainly due to the fading impact of the dislocation of the Spring Festival. Food prices fell 3.2 percent month-on-month and 2.7 percent year-on-year due to weak seasonal demand and warmer weather. Non-food prices fell 0.5% month-on-month, slowing year-on-year growth to 0.7%. Travel and travel prices fell 14.2% month-on-month in March after rising 13% month-on-month in February, as the holiday-related demand boost faded. At the same time, rising international commodity prices have pushed up domestic gasoline and gold prices. Core CPI, which excludes food and energy prices, slowed to 0.6% year-on-year from a 1.2% year-on-year increase in February, roughly in line with the fourth quarter. At the same time, the headline PPI fell by 0.1 percentage points year-on-year to 2.8% in March and fell 0.1% month-on-month. The low PPI reflects the recovery of supply and the slower recovery of demand after the Chinese New Year.
Export and real GDP growth forecasts for 2024 have been revised upwards
We raise our export growth forecast for 2024 to 3.5% (previously: 1.2% in US dollars) in light of stronger-than-expected external demand. We had expected exports to improve slightly in 2024 thanks to the technology upcycle, although growth in the US and developed markets is likely to slow. In fact, with stronger-than-expected economic growth in the U.S. and developed markets, and stronger-than-expected export performance so far, the export rebound is likely to be greater than previously expected. Recent data showed that the U.S. economy grew relatively robustly, and the UBS U.S. economic team raised its forecast for U.S. economic growth in 2024 to 2.3% from 1.1% previously, and raised its import forecast accordingly. This, combined with improved global demand, could drive stronger Chinese exports. We expect export growth to pick up to 3.5% (in US dollar terms), with real exports growing at or even higher, with net exports contributing 0.5 percentage points to real GDP growth, up 0.6 percentage points from 2023.
Real GDP growth for 2024 was revised upwards to 4.9% (from 4.6%) and nominal GDP growth was lowered to 4.9% (from 5.1% previously). The increase is mainly due to the fact that export growth may be significantly stronger than expected. On the other hand, we have lowered our forecast for real domestic consumption growth to 5.1% (previously: 5.5% GDP for final consumption), mainly due to the continued drag on the property downturn and the remains subdued consumer sentiment. While official figures showed that nominal disposable income rose 6.2% year-on-year in the first quarter, our latest labour market survey shows that the labour market recovery remains weak. In 20 provinces (out of 30 provinces), the minimum wage has increased by about 3-4% on average. Property activity and house prices have declined further over the past period, although we maintain our baseline forecast that property sales and new starts may bottom out in the coming months. The quarter-on-quarter growth rate in the first quarter was sharply stronger than expected, partly due to improved exports and the release of consumer demand pent-up during the Lunar New Year holiday. After that, we expect QoQ growth momentum to slow sharply in Q2, although it is likely to be flat at 5.3% y-o-y given the low base in the year-ago quarter. In the second half of the year, we estimate that GDP growth can stabilize at 4-5% on an annualized basis.
With year-to-date inflation hovering low, we have lowered our full-year 2024 inflation forecast. CPI grew zero year-on-year in the first quarter, and PPI fell 2.7% year-on-year, both weaker than expected, reflecting a more modest recovery in demand and a stronger supply of goods and services. We continue to expect prices for non-food consumer goods to rise modestly and expect pork prices to bottom out over the course of the year. That said, we have lowered our full-year 2024 CPI forecast to 0.4% from 0.5-0.8% previously. At the same time, prices in the manufacturing and consumer goods sectors under the PPI are likely to hover at low levels in the coming months due to relatively low capacity utilization. After falling sharply since the end of 2023, raw material prices may gradually stabilize. As a result, we expect PPI to remain down y-o-y for most of the year before turning positive y-o-y until early 2025. We have lowered our full-year PPI forecast to 1-1.5% YoY from 0.5-1% YoY previously.
We have revised our forecast for USD/CNY to 7.1-7.2 at the end of 2024. While we have raised our export and real growth forecasts, we have revised the USD/CNY exchange rate to 7.1-7.2 at the end of 2024 from 7 previously. With solid U.S. economic growth and inflationary pressures still unsubsided, market and UBS expectations for Fed rate cuts and Treasury yields have shifted significantly. The US dollar has strengthened markedly and is likely to continue to be higher than previously expected. At the same time, China's 10-year government bond yield has fallen further this year and could end the year at 2.4% as growth momentum stabilises and inflation improves. Given the strength of the US dollar and the persistence of negative interest rate differentials at home and abroad, we expect the RMB exchange rate to be weaker than previously expected by the end of 2024, reaching 7.1-7.2 by the end of the year. In the coming months, if the USD remains strong or strengthens further and the property market weakens further, we believe the RMB could depreciate further, but we still expect the PBOC to use a variety of tools to prevent the RMB from weakening too quickly or sharply against the USD.
Policy outlook
Policy support after the two sessions was relatively modest. We estimate that broad fiscal expansion could be around 1% of GDP this year, and the special treasury bond issuance at the end of 2023 will continue to support infrastructure investment. In line with our expectations, policymakers said that monetary policy would not be eased significantly. In fact, the central bank has not cut MLF rates since the beginning of the year, and credit growth slowed in February and March and was weaker than market expectations. New medium- and long-term residential loans in March were lower than a year earlier, echoing sluggish property sales, while medium- and long-term corporate loans were lower than a year-ago high. Both official and adjusted social finance (excluding equity financing) slowed to 8.7-8.8% y/y in March, reflecting weaker domestic credit demand and the government's reluctance to allow large outflows of credit to real estate and local financing vehicles. After a brief expansion in December and January, our estimated credit impulse weakened further to -1.6% (as a share of GDP, compared to -0.8% in February) in March.
Recently, the government has introduced some real estate easing policies. Since the end of January, the government has reportedly expanded the coverage of the "white list" mechanism for real estate projects to obtain credit from banks, and some cities have further relaxed the conditions for residents to buy homes. In addition, statements from multiple government departments suggest that policymakers are aware of the potential negative impact of a further downturn in real estate. However, it is too early to conclude that seasonally adjusted property sales and new construction starts have bottomed out, with high-frequency data showing a 46% year-on-year decline in property sales in more than 20 major cities in the first two weeks of April. We still expect seasonally adjusted property sales and new construction starts to bottom out by the end of Q2, but in the absence of policy support, this forecast faces significant downside risks.
The increase in policy support is likely to come only after weaker economic data. Given the stronger-than-expected economic growth in the first quarter, we believe that the government may be reluctant to further easing policy in the near term, but will continue to implement the policy measures that have been introduced and implement the policy plan identified by the two sessions. Given that market expectations for Fed rate cuts and the direction of the US dollar have shifted, we now believe that the central bank may not cut the MLF rate again this year, although there is room for another 10-15bp cut in the LPR as banks cut deposit rates further. While we believe that policy support needs to be stepped up to stabilize property activity, it may only come after weaker economic data and/or a significant credit default risk event erupts. We maintain our forecast that the PBOC may increase PSL by another RMB300-500 billion this year to step up support for affordable housing and urban village redevelopment, but the policy may not be as strong as we expect given that year-on-year GDP growth is likely to remain solid in the first half of the year. On the other hand, local financing vehicle financing is likely to continue to be constrained, especially for new investment projects in 12 high-risk provinces, so we believe there are some downside risks to infrastructure investment and overall fiscal expansion during the year.