China bucks the trend with solid activity growth

Alternative data trackers suggest the country is avoiding other big economies’ gloom


As officials gather in Washington DC for this week’s annual meetings of the IMF and World Bank, the mood on global growth prospects is understandably gloomy. The advanced economies have been hit by major shocks in their trade and manufacturing sectors, and the impact is beginning to permeate the service sectors and labour markets.

According to the latest Fulcrum nowcasts, overall activity growth in these major economies is running at only 0.8 per cent, less than half its trend rate. Their growth is bumping along the bottom.

I have previously argued that China has bucked the pattern of below-trend growth. This is surprising, since the country was widely expected to be among the major casualties from the trade wars.

Instead, Beijing’s policy easing has cushioned the blow from trade, while in Europe and the US reduced capital spending has caused a more persistent shift to below trend growth.

The accuracy of reported GDP improved following the financial crisis, though it subsequently deteriorated again. It becomes far too smooth after 2013 relative to all of our alternative measures of economic activity . . . . China’s apparent Great Moderation since 2013 is largely spurious.

San Francisco Fed, August 2019


The most recent Fulcrum nowcast for China suggests that this pattern is still intact. Activity growth is now estimated at 6.8 per cent, almost exactly its long-term trend. This is slightly better than the low points for the nowcast recorded earlier this year. Furthermore, in the course of the year, there has been no significant downward revision in consensus growth forecasts for China, for either 2019 or 2020.

Nevertheless, commentators have been painting an increasingly pessimistic picture of the outlook for the country’s growth. Even Premier Li Keqiang has been quoted as saying that:

For China to maintain growth of 6 per cent or more is very difficult against the current backdrop of a complicated international situation and a relatively high base, and this rate is at the forefront of the world’s leading economies.

Premier Li Keqiang, Reuters, 16 September 2019


In view of the importance of this topic, I have been examining other trackers to discover whether the nowcasting results are supported by alternative methodologies. In particular, it is worth noting a new index recently published by researchers at the San Francisco Federal Reserve Board (see below).

Taken together, these trackers produce a rich set of results that is reassuringly similar to our previous conclusions about Chinese growth in 2018-19. They show:

  • Estimates in a narrow range for Chinese growth centred at, or a fraction below, the trend rate of 6.8 per cent. The models all indicate that growth is on track to reach the government’s target of 6.0-6.5 per cent for this calendar year.
  • Although growth has clearly slowed since 2017, the indications are that this slowdown started from rates that were well above trend. In other major economies, the slowdown started roughly at trend, and has now taken growth fairly close to recession territory.
  • Domestic policy easing has been well calibrated to ensure recessionary forces have been held in check so far.
  • More cyclical variation is indicated than China’s gross domestic product statistics, which may have been artificially “smoothed” in recent years. Volatility in the economy is therefore understated.
  • At present, financial markets in China seem to have reflected the slowdown in growth fairly accurately.

The next batch of Chinese data will appear on Friday.


Growth trackers for the Chinese economy

Because there are longstanding questions over the accuracy of the Chinese economic statistics, especially the GDP figures, alternative data trackers have been developed to provide independent information on the cyclical behaviour of the economy. As in other economies, these trackers are far more timely than the official statistics, but in China they also include data series that are less likely to be “manipulated” by officials than the government-sponsored GDP series.

The Fulcrum nowcast is one such alternative tracker. We believe that this is based on a state-of-the-art dynamic factor model that has many advantages over other methods. The latest growth estimate is exactly on trend:


China: Real Activity Growth



Although the nowcasting framework has clear advantages, it may occasionally produce idiosyncratic results. We have therefore studied several alternatives shown in the graph below.

Note that these figures relate to 12-month growth rates, which are slightly lower than the more recent ones shown in the nowcast above. However, the picture is broadly consistent from all these trackers:


Comparing Different Economic Indicators for China





The series have been adjusted so they all show differences from trend activity, measured in standard deviations. (See this explanatory note by Jeremy Chiu at Fulcrum.)

China’s GDP is the official data.

The San Francisco Fed index uses a novel method, based on trade data recorded in foreign economies sending imports into China, thus avoiding the possibility that the underlying figures have been deliberately manipulated by statistics officials within the Chinese government.

In addition, we use two other trackers published by Andrew Tilton’s leading team of Asian economists at Goldman Sachs.

The Goldman Sachs current activity indicator (CAI) is similar to the Fulcrum nowcast, though its uses a different technique to estimate the weights in the index.

Finally, the Goldman Sachs market-implied growth indicator (MIGI) estimates the expected growth rate built into Chinese asset prices at any given time. It is derived directly from financial asset prices so shows greater volatility. Note that it does not produce a growth estimate independent of the behaviour of the financial markets. It is useful, however, in gauging whether the financial markets have a different view of Chinese growth from the direct activity trackers. That is not the case at present.


Source: This note is based on material which appeared in an article by Gavyn Davies published in the Financial Times on 13 October 2019.
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