The Chinese GDP data today came in a little better than expected at a 7.4% year-on-year pace and markets have interpreted the data as positive but Westpac’s China watcher Phat Dragon warns that things are not as they seem.
At issue is the difference between the “nominal” rate of growth and the “real” rate of growth which is the one that global GDP data is reported in.
Phat Dragon noted that while the 7.4% was in line with his estimate at issue was the fact that: “Nominal GDP was extremely weak at 7.9% versus 9.7% in Q4 and 9.6% a year ago.” Crucially this is the weakest level of nominal GDP growth outside the GFC period since 1999 and it was only a big drop in the GDP deflater that tempered the result in “real” terms.
“Real” GDP data is adjusted for inflation so it can either understate or overstate the nominal growth rate but it is the nominal growth rate which is felt by exporters and merchants in their daily lives and trade with China.
So today’s data is actually a big worry for global growth.
Ominously Phat Dragon says:
Phat Dragon’s narrative since late 2012 has been that the peak for momentum would be in Q3 last year, Q4 would see a modest deceleration ahead of a pronounced slowdown in early 2014. That framework has held up extremely well in aggregate.
We have all been warned.