Chinese economic growth slowed to 4% year-on-year in Q4 2021 from 4.9% in Q3. In the industrial sector, the situation improved slightly in Q4 after a summer that was badly disrupted by power cuts and supply-chain problems. Industrial growth accelerated from 3.1% y/y in September to 4.3% in December, driven by the still strong performance of exports (up 22.9% y/y in Q4). In the immediate future, however, manufacturing output and exports are likely to suffer from repercussions arising from the latest wave of the pandemic.
Economic figures for November once again show the dynamic momentum of Chinese exports (+21.4% year-on-year in current dollars), which continues to drive production and investment in the manufacturing sector. Our barometer highlights a deteriorated industrial performance in September-November 2021 compared to the previous 3-month period. Yet the industrial situation has been picking up slowly since October, after major disruptions in September due to power outages and supply chain disruptions. Industrial production rose 3.8% y/y, compared to 3.5% in October.
The Japanese economy revived in the fourth quarter after the state of emergency related to the Covid-19 infections was lifted in all prefectures in October. In particular, sentiment in the services sector has clearly improved. The quarterly Tankan survey showed that actual business conditions in the non-manufacturing sector gained 7 points in December compared with three months earlier. Moreover, consumer confidence improved in October and November to levels seen before the outbreak of the pandemic, although remaining low relative to its long-term average. By contrast, the gains in the manufacturing sector were minimal, as activity continues to be affected by supply disruptions and rising production costs that are reducing profit margins
The crisis in the real estate sector, the “zero Covid” strategy in the midst of a resurgent pandemic, and the persistent fragility of household consumption are some of the main risk factors straining China’s economic growth. In the short term, the authorities are expected to cautiously step up monetary and fiscal policy support while maintaining their focus on rebalancing the property market, reducing financial risks and tightening the regulatory environment.
The victory of the Liberal Democratic Party in the October general election allows prime minister Kishida to implement his policies. In November, he presented an unprecedented fiscal package amounting to some JPY55.7trn or 10% of GDP. In 2022, GDP growth could rise to 2.6% after 1.7% in 2021, largely driven by private consumption.
Our monthly Pulse highlights the cyclical deterioration of the Chinese economy in August-October 2021 compared to the previous 3-month period. While the situation in the industrial sector improved in October after a sharp slowdown in September, the correction in the real estate sector has continued. Industrial production growth picked up slightly in October (+3.5% y/y in real terms, compared to 3.1% in September and 5.3% in August). In fact, the measures introduced by the authorities rapidly eased energy constraints last month.
Chinese real GDP growth slowed to 4.9% year-on-year (y/y) in Q3 2021 from 7.9% in Q2 2021. In the services sector, growth slowed sharply in August (+4.8% y/y), due notably to the reintroduction of lockdown measures to counter a new surge in Covid-19 cases. Although services growth rebounded in September (+5.2%), it is still sluggish. Tighter regulations in a number of segments, including online services, tutoring and video gaming, have constrained activity. The services sector has also been hit by the downturn in the real estate market due to a severe tightening of prudential regulations and credit conditions in the sector. In Q3 2021, house sales contracted while property developers have encountered increasing financing and cash-flow problems
In the past few months, activity was hampered by the state of emergency in large parts of the country, which affected in particular the services sector. In addition, the manufacturing sector was confronted with supply disruptions, specifically in the car industry. Finally, the substantial base effects related to the pandemic make it difficult to interpret the year-on-year data.
The Chinese economy is in the midst of a period of major adjustments. They arose after Beijing tightened regulations in a variety of sectors, from housing to certain new technologies and activities linked to the societal challenges facing the country. The adjustments can also be attributed to the debt excess problem of some state-owned and private enterprises, and reflect the authorities’ determination to tighten their access to credit and to clean up practices in the financial sector. As a result, an increasing number of corporates is defaulting, and the troubles of the property developer Evergrande are symptomatic of the changes under way
India’s economic and financial situation has consolidated slightly since the summer. After contracting sharply in Q2 following the spread of the Covid-19 pandemic, economic activity rebounded strongly in Q3. Even so, at end-September, only 20% of the population was fully vaccinated, which means the country is not sheltered from a third wave of the pandemic. Growth prospects are still looking good for the rest of the year. Household consumption will benefit from falling inflation and higher government spending. Business leaders are still confident, even though they are taking a cautious approach to investment plans. Borrowing rates are low, and the banking sector, though still fragile, is doing better than it was three years ago
Although the political situation has stabilised somewhat following the appointment of a new prime minister, the economic environment has deteriorated. The spread of the Covid-19 pandemic in April forced the government to reintroduce lockdown measures that led to an economic contraction in Q2 2021. The situation is unlikely to improve before Q4, once health restrictions are lifted thanks to an accelerated vaccination campaign. In an attempt to boost growth, the government launched a series of economic support plans, even though fiscal revenue fell short of the full-year target in the first seven months of the year. Consequently, according to the Ministry of Finances, the fiscal deficit is expected to swell to between 6
The third wave of the Covid-19 pandemic is unlikely to jeopardise the dynamic momentum of South Korea’s economic recovery. Solid fundamentals, diversified exports and massive fiscal and monetary support should help limit the impact of the crisis on the country’s medium and long term growth prospects. In contrast, an ageing population continues to erode the country’s growth potential and public finances, even though the government has implemented a series of structural reforms. Household debt has picked up rapidly over the past 18 months. The associated credit risks are limited, however, thanks to the implementation of macroprudential measures and the comfortable level of household financial assets.
The economy is likely to rebound in Q4 as health restrictions are being eased. Moreover, despite supply chain disruptions, the manufacturing sector should profit from the worldwide recovery. The consumption boom is likely to peter out soon, as wages growth is to remain sluggish. The main domestic support will come from the government spending, backed up by Bank of Japan (BoJ) ’s yield curve control policy, and business investment thanks to improved profitability. Prime Minister Suga’s resignation, although welcomed by financial markets, has rekindled fears that Japan may return to the “revolving door” era, in which the country changes prime minister every year.
India’s public finances remain fragile, though strengthening over the first four months of the current fiscal year (to 31 March 2022). The central government’s fiscal deficit hit a high of 9.2% of GDP at the end of the 2020-21 fiscal year from an average of 3.8% of GDP over the previous five years. Over the same period, public debt has steeply risen, and is estimated to have reached a high of 88% of GDP in March 2021. The rapid deterioration of the public finances is the result of increased public spending in response to the Covid-19 crisis, but is also due to an extremely low fiscal base (total government’s receipts only reached 8.6% of GDP even before the pandemic). Under such circumstances, one might have feared a deterioration of the India’s sovereign rating
China’s public finances have been deteriorating for several years now, and the trend accelerated in 2020 with the Covid-19 crisis. Reforms introduced since 2014 have made the public sector’s accounts more transparent and improved the management of local governments’ budgets and debt. However, those changes have not stopped fiscal imbalances building up. In addition, large quasi- and extra-budgetary operations exist alongside the official budget, and there are many, sometimes opaque, links between the various public-sector entities. This means that analysing the public finances is often a complicated exercise.
China’s economic growth slowed sharply over the summer. Lockdown measures reintroduced in response to the resurgence of the Covid-19 pandemic and the threat of the new Delta variant dealt another blow to private consumption. Growth in retail sales volumes dropped to 6.4% year-on-year in July and then to 0.9% in August, from an average of 11.9% in Q2 2021.
The Covid-19 crisis did not spare India, and like many of the emerging economies, the country’s economic and social situation has deteriorated sharply. Yet India’s situation had already begun to deteriorate well before the onset of the pandemic, which only accentuated the country’s weaknesses. The very sharp contraction in GDP triggered by the Covid-19 pandemic highlights the economy’s structural vulnerabilities, especially the large number of workers without social protection. With the nationwide lockdown in April and May 2020, 75 million Indians fell below the poverty line, and there is reason to fear that the second wave could have a similar impact
Economic growth reached 7.9% year-on-year (y/y) in Q2 2021 vs. 18.3% in Q1 2021. This apparent slowdown is the result of growth rates gradually returning to normal in all sectors and all demand components; it was largely expected as base effects have become less favourable since last spring. This trend explains the contraction of the blue area compared to the dotted area in our Monthly Economic Pulse.
Economic growth rebounded very rapidly following the Covid-19 shock, but this rebound has also been characterised by mixed performances between sectors and between demand components. Growth of industrial production and exports accelerated vigorously until early 2021 and is now gradually returning to normal. Meanwhile, the services sector and private consumption were slower to rebound, and their recovery still proved to be fragile in Q2 2021. Consequently, the authorities are likely to be increasingly cautious about tightening economic policy. Even so, they should still give priority to slowing down domestic credit growth and adjusting the fiscal deficits.
The second wave of the pandemic seems to have passed after new cases peaked in May. Economic activity is unlikely to contract as much as it did last year, and the decline should be limited to the second quarter. Yet the second wave is estimated to have cost more than 2 percentage points of GDP, and it comes at a time when households are still struggling to recover from the impact of the first wave. In 2020, 75 million people dropped below the poverty line. Moreover, the rebound expected this year might not suffice to stabilise the public debt ratio, which could lead the rating agencies to downgrade India’s sovereign rating. In this very uncertain environment, the rupee is not benefitting from the strength of India’s external accounts.
The health crisis is barely improving in the Philippines. After a particularly severe second wave, the number of new Covid-19 cases seems to have levelled off, albeit at a high level. Yet the full vaccination rate is very low, which means that the tight health restrictions which must be kept in place are weighing on domestic demand and the tourism sector. After contracting by more than 9% in 2020, GDP should rebound moderately in 2021. Even so, the country still has high growth potential thanks to the reforms undertaken over the past decade, which are paying off.
The Covid-19 pandemic did not hit the Japanese economy as hard as the other advanced countries. In 2020, GDP growth did not contract as much as in other places. Yet a slow vaccination roll out and the lack of confidence of various economic agents are straining the momentum of Japan’s recovery. After a strong performance in late 2020, the Japanese economy is lagging somewhat compared to the United States and Europe. Consumer confidence – a key ingredient for a robust economic recovery – is still low compared to pre-crisis levels. This atmosphere is dragging down private consumption and the dynamics of the tradeable services sector as well. The services industry is having a hard time swinging back into growth
An accelerated vaccination campaign reduces uncertainty for economic agents – households and companies – and offers a brighter economic outlook. The Bank of Japan’s Tankan index rose in Q2 2021 in both the manufacturing and non-manufacturing sectors.
