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China GDP to slow further in Q1 but the recovery could be around the corner

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All eyes on Wednesday will be on China’s growth figures for the first quarter, due at 02:00 GMT, as the world’s second largest economy continues to lose steam. But while China’s GDP growth is expected to have slowed further during the first three months of the year, there are encouraging signs lately that the slowdown is leveling off and a rebound is on the way.

After expanding by an annual rate of 6.4% in the final quarter of 2018 – the slowest pace since the financial crisis – China’s economy is expected to have grown by 6.3% in the first quarter of this year. Although such a figure would represent only a modest slowdown from the prior quarter, it would nevertheless make it the weakest growth in nearly three decades.

As economists debate whether the alarming deceleration in growth is mainly down to the government’s deleveraging efforts or the trade war with the United States, it appears that authorities’ recent actions to counter the slowdown seems to at least be starting to have some impact.

The first glimpse of a turnaround came from the March manufacturing PMI, which returned to expansionary territory. They were followed by trade figures last Friday that showed exports jumped sharply in March, and from a bigger-than-expected increase in bank lending during the same month. The data fuelled hopes that the worst of the slowdown is over and the economy is gaining momentum again.

With March indicators so far pointing up and at the same time, trade negotiations with the US looking like they’re nearing the end game, the GDP numbers on Wednesday could be overshadowed by the other data that are also due for release. Accompanying the growth figures will be monthly stats on industrial production, investment in urban areas and retail sales.

Growth in Chinese industrial output had fallen to a 17-year low of 5.3% year-on-year in February, but analysts are predicting a pick up to 5.9% in March. Fixed-asset investment is also forecast to accelerate, rising by 6.3% in the year-to-date to March after a 6.1% increase in the prior month. Improvement in retail spending is being anticipated too, with sales forecast to have grown by 8.4% y/y in March compared to 8.2% previously.

A strong rebound in the March data would further bolster views that China’s economy is turning the corner and could offset any slight disappointment in the headline GDP figure. It would also lift risk-sensitive currencies, particularly the Australian dollar, which is often traded as a liquid proxy for China-related developments.

Having hit a 1½-month peak of 0.7192 on Friday, AUD/USD could overcome resistance at the 200-day moving average if the numbers out of China beat expectations. A break higher would bring the January top of 0.7295 into range.

Alternatively, any setback in risk sentiment from a worrying set of figures would pull AUD/USD below nearby support at the 50-day moving average, just above the 0.71 level. Slipping below the 0.71 level could open the way towards the March low of 0.7000.


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This information is not considered as investment advice or investment recommendation but instead a marketing communication. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Source: XM

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