China: Real GDP Picked Up in the Third Quarter

China's real GDP growth exceeded the consensus forecast for a 0.9% quarter-over-quarter increase. The government's stimulus measures, which were implemented in response to its poor economic performance last quarter, seem to be paying off. Domestic demand appears to be recovering as retail sales growth exceeded forecasts and accelerated for the third consecutive month in September. However, inflation remains largely non-existent, which shows how fragile China's growth is. 

The housing market remains bogged down. New home sales continue to decline and have now dropped 44% from their April 2021 peak. Despite numerous government measures, consumer and business confidence in the sector is struggling to recover. The stakes are high for China since housing represents 25% of economic activity when direct and indirect effects are taken into account. It'll take another few quarters before we see a meaningful housing market rebound, so the sector is unlikely to contribute much to real GDP growth.

The Chinese government is facing several headwinds, including high youth unemployment, a sluggish real estate market, low consumer and business confidence, rising geopolitical tensions and a global economic slowdown. However, the stronger-than-expected performance combined with revisions to previous prints lead us to raise our forecast of real GDP growth to 5.5% for 2023.

Real GDP is expected to surpass the central government's official 2023 growth target of 5.0%. As a result, any new stimulus measures are likely to be more modest and focused on specific issues like new home purchases and youth unemployment.