The official target for GDP growth for China is 7.5% in 2014.  In the first half of the year GDP growth came within a whisker  of that result with year-over-year GDP growth of 7.4% in Q1 and 7.5% for Q2.  That level of performance has been thrown into real doubt for the second half of the year since Industrial Production (IP) rose by only 6.9% in August, year-over-year, well below the expections of economists polled by Reuters.  Fixed asset investment and retail sales also came in below expectations.  This shortfall is very significant because IP has historically been a very reliable indicator for China's GDP.

The expectation for IP in August had been 8.8% growth, which was the average for the first seven months of the year.

The latest number is the lowest since the depths of the Great Recession in the first half of 2009.

Comparing the IP graph above and the GDP graph below the problem for China achieving its growth target is immediately evident.  IP has always led GDP by a healthy amount, at least back through 2008. Starting with 2010 Econintersect has calculated the following relationships:

• 2012 through 2Q 2014 - IP has exceeded GDP by an average of 2.0%, with the smallest margin 1.3%.
• 2010-2011 -  IP exceeded GDP by an average of 4.4%, with the smallest margin 1.3%.

Unless the August IP number is a one-off anomaly, the second half expectation for GDP is well below the government target of 7.5% growth.  If September IP growth were to come in at 7% the expected 3Q GDP growth would be 5.7% (6.4% max possible based on historical relationship).  If the three months of the fourth quarter were to average 7% IP growth the expected 4Q GDP growth would be 5% (5.7% max possible).  Note:  These estimates are made using the most recent 10 quarters of  data.  If the data from the beginning of 2010 is included then the average expectations for GDP would about 1% lower (4.7% 3Q and 4.0% 4Q).

What kind of global economic turmoil might ensue if China's GDP growth were cut by 20-40% in the second half of 2014?  We may well find out if the August IP growth reading of 6.9% is not an anomaly and is repeated going forward.

John Lounsbury

Sources:

• China Aug factory output up 6.9 pct yr/yr, below expectations (Kenin Yao,Reuters, 13 September 2014)

• China Industrial Production (Trading Economics, 14 September 2014)

• China GDP Annual Growth Rate (Trading Economics, 14 September 2014)

• China: Consumer Inflation Stays Low, Producer Prices Continue Deflation (GEI News, 11 September 2014)