Analysing China’s economy has always been fraught with difficulty. But Covid-19 has made the job that much harder, not least as a key dataset we used to produce the Enodo real GDP growth estimate was discontinued earlier this year. But that just makes us even more determined to figure out where the economy is headed at this critical juncture. 

Data, data, data… we collect as many pieces of the puzzle as possible and try to build a coherent picture of what’s going on in the economy. We resolved the latest problem by finding a suitable price series to substitute for the now discontinued fixed asset investment price data we used to deflate nominal investment spending.  

But, more importantly, in this note we introduce to you Enodo’s nowcasting model for forecasting China’s GDP.

Its main message is a sobering one for Beijing and could well extend to the rest of the world. On current readings, our model suggests that it will take until the start of 2022 for real output to regain its pre-Covid-19 level. 

That is going by the official data. But going by the way Enodo constructs its estimates, Beijing will have to wait till the beginning of 2023 for real GDP to get back to where it was before the pandemic struck.

Beijing just unveiled a comprehensive stimulus at the delayed National People’s Congress. There’s more to the plan than meets the eye. On the face of it, the authorities are trying to show that they’re making a strong and responsible effort to lift the economy out of its coronavirus-induced slump.

Beijing has pledged a record Rmb4trn in cost cuts, including tax exemptions, lower bank rates, waived contributions to social welfare funds and reduced prices for utilities such as electricity. This contrasts with the Rmb4trn stimulus package in response to the Global Financial Crisis, which was focused on debt-fuelled state spending.

But Premier Li Keqiang also announced Rmb1trn in additional spending to be raised from a 0.8 percentage point increase in the central government’s fiscal deficit ratio, taking it to 3.6% of GDP, along with Rmb1trn from sales of special treasury bonds.

In addition, Beijing has also given local governments approval to issue another Rmb1.6trn of special purpose bonds that will be used to fund infrastructure construction. Behind the scenes, the authorities have also been putting pressure on state-owned enterprises to ramp up investment.

How effective China’s efforts will turn out to be, and how they will alter the trajectory the data are indicating, remains to be seen. We have argued that every yuan thrown at the economy now will produce that much less bang than post-2008. This is where the Enodo nowcasting model comes in, allowing us to monitor a large set of key data and what they tell us about GDP growth in real time.

The nowcasting model extracts the latent factors driving movements in the data and produces a forecast of each economic series that it tracks: when the actual release for that series differs from the model's forecast, this`news' impacts the nowcast of GDP growth.  

According to the model, based on how Enodo estimates GDP we can expect no real growth in Q2 followed by a gradual recovery over the next four quarters to about an average of 1% qoq. On the official GDP data, the rebound in H2 this year and H1 next year is stronger, averaging 1.7% qoq.

You can read more about how we construct the model in the Appendix below. We will soon be adding it to our website for you to monitor in real time as the various series that make up the model are updated each month.