Mainland growth engine may be slipping into reverse

Tomorrow, the mainland will release its economic growth data for the fourth quarter of last year. The numbers will be ugly.

The consensus among private-sector economists is that the statistics bureau will announce gross domestic product growth of about 7 per cent for the last three months of 2008.

If that forecast is right - and there are plenty of analysts who think it is too optimistic - it will be the lowest growth rate the mainland has recorded since the last quarter of 2001, when global trade took a severe beating in the aftermath of the 9/11 terrorist attacks.

That would be unpleasant enough. Unfortunately however, on this occasion the ugliness is unlikely to be merely skin deep. The deeper you look into tomorrow's data, the nastier the view is likely to get.

That's because Beijing announces its GDP performance on a year-on-year basis. In other words, the statistics bureau measures growth by comparing the economy's output of goods and services over a three month period with the output during the same three months of the previous year.

This method has its advantages. For example, it helps iron out seasonal distortions like those produced by the Lunar New Year holiday.

But its drawback is that it is a blunt instrument; it only tells you how the economy has evolved over the last 12 months. If you want to see finer detail, for example how output has changed in response to recent events like the global financial seizure that followed the September collapse of Lehman Brothers, then you need to compare output with the previous quarter.

This is where the picture is likely to get really gruesome. The consensus view for the fourth quarter of 7 per cent year-on-year growth equates to a quarter-on-quarter performance of very close to zero growth. In other words, if the consensus is right, China's mighty economic growth engine stalled completely in the last three months of 2008.

That's if the consensus is right. Not everyone believes it is. Analysts at Goldman Sachs are expecting year-on-year growth of just 6.5 per cent. That would imply that the mainland economy actually shrank in the final quarter of last year, contracting by 0.6 per cent compared with the previous three-month period (see the first chart below). Others think the output slump could have been even more severe.

If the notion that the mainland economy may have gone into reverse seems far-fetched, there is some good evidence to support the idea. Exports are falling, dropping 2.8 per cent in December (year-on-year) after a 2.2 per cent decline in November. Production at many factories has halted in order to run down a massive build-up in unsold inventories. And private-sector property investment has all but ground to a halt after residential prices in major cities fell 20 per cent or more in 2008.

What's more, electricity generation - frequently used as a proxy for GDP growth - declined abruptly in November (see the second chart), with analysts at Macquarie warning December's power production could have fallen by as much as 10 per cent compared with December 2007.

The government isn't sitting idle in the face of this pain. In November Beijing announced a massive economic stimulus package focused largely on infrastructure investment, while the central bank has slashed interest rates and ordered the country's banks to ramp up their lending.

Yet doubts persist whether the stimulus measures can compensate for the deterioration in international demand for China's exports combined with the decline in the domestic property market and the weakening in consumer confidence in response to rising unemployment and the tougher economic environment.

As a result, it is likely that even if the probable fourth-quarter contraction in the mainland economy proves a one-off, the numbers will look nasty well into the first half of this year.