China’s economic growth falls short of forecasts

China's economic recovery unexpectedly stumbled in the first three months of 2013 with slowing factory output and investment spending forcing analysts to start slashing full-year forecasts despite official insistence that the outlook was favourable.

The world's second-biggest economy grew 7.7 per cent in the first quarter from a year ago, slower than 7.9 per cent hit in Q4 2012, below the Reuters consensus forecast of 8.0 per cent and confounding expectations of a surprise uptick that emerged after surging credit and export data were published last week.

"This number may well explain why there was so much liquidity support in Q1," Tim Condon, head of Asian economic research at ING in Singapore, told Reuters.

"Industrial production is unexpectedly weak and that's the source of weakness in GDP. Based on this, the consensus forecasts for GDP are going to be headed lower and we'll certainly be looking at ours," Mr Condon added.

RBS duly obliged, cutting its full year forecast to 7.8 per cent from 8.4 per cent before the data.

"This is both due to the impact of the weaker start of 2013 and because the Q1 data shows slower quarter-on-quarter growth momentum than expected," Louis Kuijs, chief China economist at RBS in Hong Kong, wrote in a note to clients.

His observation on quarterly growth was shared by others equally concerned about quarter-on-quarter expansion easing to 1.6 percent in Q4 from 2.0 per cent in Q4.

Sheng Laiyun, spokesman at the National Bureau of Statistics which released GDP in a flurry of other data on Monday, told a news conference that such worries were unfounded.

"China's economic fundamentals haven't changed. We are confident about future growth and optimistic about achieving this year's growth target,"Mr Sheng said.

China has set a 7.5 per cent GDP growth target for 2013, a level Beijing believes will create sufficient jobs while providing room to deliver structural reforms the government -- and international policy advisers -- believe are necessary to put growth on a more sustainable long term footing.

"Employment is very stable," Mr Sheng said. "Stable employment is a basic indicator of China's economic stability," he added, quoting Ministry of Labour and Social Securities data showing that China created over 3 million new jobs in the first quarter.

Stability underwhelms investors

Stability clearly underwhelmed investors who had priced in an acceleration from the fourth quarter. Such an uptick would have underpinned the recovery trades that had gathered steam in the wake of data last week that showed a near 60 per cent increase in total credit in the economy in Q1 2013 versus Q1 2012.

Commodities from crude oil to copper, wheat and corn all fell after the data, share prices were knocked lower and the Australian dollar slid as investors repriced expectations of import demand from China.

A 0.1 per cent downgrade of the World Bank's 2013 China growth forecast to 8.3 percent following last week's cut to the global trade outlook from the World Trade Organisation, was a further blow to economists anticipating that broadly brighter global economic data in Q1 would underpin China's recovery.

Industrial output growth of 8.9 per cent on a year ago in March versus expectations of 10.0 per cent and fixed asset investment growth of 20.9 per cent in Q1 versus the 21.3 per cent market consensus were big drags on sentiment -- as well as GDP.

The most sluggish increase in power generation in six months, up 2.1 per cent year on year in March, and a 3.2 per cent fall in daily crude steel output in the same period, were taken as signs of cooling activity.

That data, released alongside GDP, overshadowed a gentle uptick in retail sales growth to 12.6 per cent year-on-year in March from 12.3 per cent in February and expectations of 12.5 per cent.

Recovery delayed

The rapid rise of a new consumer class in China is a factor that keeps investors broadly optimistic about the longer-term future of the economy, provided policymakers can rebalance the drivers of growth away from the investment spending and exports to which it is currently tilted.

Domestic consumption was the biggest driver of growth in Q1, delivering 4.3 percentage points of the 7.7 per cent total. Capital formation delivered 2.3 percentage points while exports generated the 1.1 percentage point balance.

But as construction is a major component of domestic consumption, economic activity is still largely dependent on investment spending which is currently worth around 50 per cent of GDP and a level which worries the International Monetary Fund, among others.

China's real estate investment rose 20.2 per cent Q1 on a year earlier, while revenues from property sales rose 61.3 per cent, adding to worries of an unsustainable house price boom -- though a profit warning from construction equipment maker, Zoomlion, was a sign that Beijing's property cooling measures are biting.

Real estate investment was worth 11 percent of GDP Q1 and directly impacts around 40 other business sectors.

The key question for economists is whether China's recovery momentum from its weakest full year of growth since 1999 has been reversed -- and not simply slowed -- and sees the government tinker with policy settings in response that create problems further down the road.

"I hope they don't ease because policy is already very easy," Tao Wang, China economist at UBS in Hong Kong, said.

"I don't think this is a turning point for slower growth. I think the recovery is probably delayed, but I think the recovery is still coming."