China has been on the verge of a hard landing for many years, according to some analysts. Will they finally be right in 2019? In this issue of Sinology, I explain that in the fourth quarter of 2018, China's economic deceleration was not significantly sharper than I expected, and several policy changes should lead to stronger activity and market sentiment in the second half of this year. A hard landing is still not on the horizon.
There was not a sharp slowdown in the last quarter
Everyone paying careful attention to China should have expected the year-on-year (YoY) growth rates of almost every aspect of the economy to slow a bit last year, as that has been a consistent pattern for about a decade. The economy has become so large, and growth rates were so fast for so long, that this deceleration is inevitable.
What has worried many observers, however, is the perception that in the last quarter (4Q18), China's growth rate slowed much more sharply than expected. With final data for 2018 now in hand, let me explain why that perception is not accurate.
Still the world's best consumer story
Let's start by examining the largest part of China's economy—consumption.
Income growth is, of course, the foundation of consumer spending, and in 4Q18, inflation-adjusted (real) income growth slowed a bit, to 6.2% YoY, down from 6.9% in 4Q17. That degree of slowdown was within my expectations, and it is worth noting that last quarter's pace was roughly the same as the 6.3% recorded in 4Q16.
One data point that did surprise on the downside in the last quarter was the nominal growth rate of retail sales of consumer goods by larger firms, which slowed to 2.6% from 7.3% in 4Q17. But, this sharp deceleration was due almost entirely to a collapse in auto sales, which fell by 8.3% YoY, in contrast to a rise of 4.4% during 4Q17.