China Could See Sub-6% Growth This Year: Deutsche Bank

China Could See Sub-6% Growth This Year: Deutsche Bank

If you are a macro guy and watching China, this one should ring alarm bells.China’s growth forecast keeps slipping (as the “lowest level” keeps getting pushed down) and could call into the 5s range, not in a decade but this year!

China continues to gradually slow down, and there is a risk the country could see sub-6% growth for a couple of quarters this year, notes Deutsche Bank.

In its March 24, 2015 “House View”, David Folkerts-Landau and the Deutsche Bank research team note global growth of 3.4% is broadly in line with 2014, with the emerging markets slowdown offsetting the recovery in developing markets.

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China experiences slow down

According to the Deutsche Bank report, EM growth will likely slow to 4.3%, as major EM economies (except India) fail to gain traction. The DB analysts believe the U.S. will post a robust 3.3% growth rate in 2015 compared to 2.4% in 2014.  Thanks to cheap oil, a weaker euro and QE, the analysts also revised Eurozone growth upwards to 1.4% and Germany to 2.0% (both from 0.8% in November).

However, the analysts note the key risks to their projections remain a return to crisis in Europe, a sharper slowdown in China (and the US) and earlier or faster Fed hikes. The following chart captures the various risks that would alter the analysts’ forecasts:

Turning their attention towards China, David Folkerts-Landau et al. note China’s economic slowdown can be seen in various weak economic data, including a slowdown in industrial production in January and February, an over 15% slump yoy in property sales volume, and governments experiencing lower income from land sales.

The DB analysts point out that China’s economy is transitioning from an export- and investment-led economy to a consumption-led model. They note such a policy would be a net positive and would make growth more sustainable in the long-run, but it would come at a price of lower short-term growth.

Thanks to weak data across the board and sharp reduction in fiscal revenues, the analysts anticipate that downsides to China’s growth are rising. They project  China’s first half growth at 6.8%:

China's weak growth China

David Folkerts-Landau and colleagues, however, anticipate additional money policy easing would prevent China’s growth dipping below 6%. Moreover, they anticipate rate cuts in April and May.

Eurozone surprised to the upside

As regards Eurozone is concerned, the DB analysts believe macro data in the Eurozone has surprised to the upside. They believe this would bode well for 2015, which has led to upward revisions for growth. Eurozone growth forecasts have also been revised upwards to 1.4% in 2015 and 1.6% in 2016:

Europe growth forecast China

Moving their attention to the U.S., the DB team notes US equities have stagnated since the beginning of the year and are vulnerable to a correction before trending higher. They anticipate the S&P 500 could witness a 5 to10% correction as Fed hikes draw closer:

S&P 500 could correct China

As regards EM growth, the analysts point out that EM growth remains weak as idiosyncratic factors add to global headwinds. With both Russia and Brazil in recession, the analysts anticipate EM growth will decelerate again in 2015:

EM growth set to drop China

The following chart captures DB forecasts across various parameters:

DB's growth forecasts China

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