China GDP slowdown in third quarter growth ramps up fears of more economic trouble ahead

China’s weaker-than-expected third-quarter economic performance has fueled fears of “stagflation” in the final three months of the year, analysts say.

China’s gross domestic product (GDP) grew by 4.9 percent in the three months ending September, missing market expectations of 5% growth and far below the 7.9% gain seen in the second quarter and the blistering 18.3 percent expansion seen between January and March, according to new data released by the National Bureau of Statistics on Monday.

While growth was exceptionally robust in the first half of the year because to a post-pandemic recovery, the third quarter’s performance was hampered by a power outage, Delta variant breakouts, natural calamities such as floods, and Beijing’s regulatory crackdown on many sectors of the economy.

“In terms of absolute economic growth rate, the fourth quarter of this year and the first quarter of next year could be the bottom of the current economic circle,” said Zhou Hao, a senior emerging markets economist at Commerzbank AG, who predicted China’s GDP growth rate to fall to around 3 to 3.5 percent in the final three months of the year.

China’s economic growth, according to Lu Ting, chief economist at Nomura, would slow to 3% in the fourth quarter and stay there through the spring.

Xu Yating, the senior economist at IHS Markit, wrote in a note on Monday that slower global economic growth would add headwinds to China’s international trade, and hence output and GDP growth.

China’s industrial production disappointed the market in September, rising only 3.1 percent from a year earlier, down from 5.3 percent in August, and falling short of the forecasted 3.9 percent increase.

The significant slowdown was fueled in part by China’s factory-gate inflation, which hit a new high of 10.7% last month, fueled primarily by rising coal prices. Production is no longer economically viable for many smaller enterprises.

“Since the beginning of this year, international energy prices have risen significantly, the price of natural gas and crude oil has repeatedly reached record highs, and the domestic supply of electricity and coal is tight,” Fu Linghui, a spokesman for the NBS, said at a press conference on Monday.

“A variety of factors have led to power rationings in some places recently, which has had a certain impact on normal production.”

At the same time, data released on Monday indicated that China’s raw coal and coking coal output fell by 0.9% and 9.6%, respectively, from a year ago in September, causing another wave of price hikes for both thermal and coking coal futures.

In the January-September period, fixed asset investment — a measure of spending on assets such as infrastructure, property, machinery, and equipment – increased by 7.3 percent compared to the same period the previous year. This was lower than the 8.9% increase in fixed-asset investment from January to August.

Retail sales jumped 4.4 percent this month, up from 2.5 percent in August and above the 3.5 percent growth predicted by economists in a Bloomberg poll.

The current economic situation has sparked fears of stagflation, which occurs when an economy experiences slow growth, high inflation, and high unemployment.

Some economists have raised the possibility of stagflation like that observed in the United States in the 1970s when commodity prices skyrocketed and supply chains stalled, followed by interest-rate hikes and recessions.

“The third-quarter data showed further signs that the risk of stagflation is rising,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management

“Yet, the unemployment rate declined, which is puzzling,” he said, adding that could help the economy avoid stagflation for now.

Instead, Shen Xinfeng, chief macro analyst at Northeast Securities, believes China will enter a stage of “quasi-stagflation” in the last months of the year, characterized by strong producer price inflation and moderate consumer price hikes but sluggish economic growth.

“Under such a situation, we believe China’s monetary policy would be caught between a rock and a hard place to some extent in the fourth quarter,” she said.

That could explain Beijing’s reluctance to loosen monetary and fiscal policies in order to boost economic activity, however, Zhang cautioned that this could mean the economy will stall even more in the fourth quarter.

Following the release of the NBS data, Yao Jingyuan, a special research fellow in the State Council’s Counsellors’ Office, stated that policymakers need not be concerned about stagflation.

“China will not have high inflation or hyperinflation, we do not have the basis or conditions,” he told a press briefing.

Instead, he suggested that with pig prices still falling, the country might need to think about how to stabilize household costs and that low consumer price inflation allowed China room for greater monetary easing.

In the fourth quarter, he expects the central bank to reduce the reserve requirement ratio by one percentage point.

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