Although the full impact from the coronavirus pandemic has yet to be tabulated, China has so far kept its place as one of the world’s fastest-growing major economies. However, there are several key business cycle indicators that could signal that the People’s Republic torrid financial expansion may deteriorate even if a severe meltdown is not on the immediate horizon.
Economic downturns typically happen within roughly 8 to 16 months from when a country’s Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis hits a plateau–and stays there. So far China’s economy appears to be on track to stay healthy, despite trade war risks and political unrest notably in Hong Kong.
The Economist notes that the average length of an expansion is 38.7 months compared to 17.5 months during a recession, albeit actual experience can vary dramatically. Also, be aware that cyclical indicators are erratic with multiple dependencies and side effects on GDP. Worst of all, there is no consensus for which indicators universally trigger GDP growth or contraction in every single case.
Therefore, it is worthwhile to carefully monitor year-over-year GDP percentage growth for Asia’s colossus. That metric is the bottom-line benchmarks when an economy enters boom or bust mode.
To give some structure amidst the chaos, the following analysis organizes key business indicators into 3 categories. Leading indicators turn in advance of a cycle change. Coincident indicators define when the overall business cycle turns. Thirdly, lagging indicators are those that top out following a business cycle.
China’s Leading Business Cycle Indicators
For the People’s Republic of China, one of the chosen 5 leading indicators below declined over the 12 months preceding the latest reporting period. However, that slowdown was for the all-important retail sales metric.
China’s current interest rates do allow a little wiggle room for future monetary easing via lowering tates. The Economist estimates that an economy hits its highest level about 18 months after interest rates begin to rise.
Both business confidence and consumer confidence in the People’s Republic remain strong. China is a world leader in capital investment, so any dramatic setback to its business confidence could create severe aftershocks. Consumer confidence is the lifeblood driving sales that support economic growth.
- Interest rates: 4.05% at Feb. 2020 (no change from one year earlier)
- Business confidence: 98.97084 points at Jan. 2020 (up 0.31% from 98.6683)
- Consumer confidence: 104.3744 at Nov. 2019 (up 0.93% from 103.4083)
- Retail sales: Up 3.81% at Dec. 2019 (down -2.48% from up 6.29%)
- Car sales: 1,614,000 vehicles at Jan. 2020 (up 33.4% from 1,210,000)
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity.
Consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
The car sales metric specifies the number of vehicles sold irrespective of price.
China’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that the Chinese economy remains robust given its positive annual growth.
- GDP: US$29.471 trillion at Jan. 2020 (up 7.9% from $27.309 trillion for 2019)
- GDP per capita: $10,872 at Jan. 2020 (up 7.7% from $10,099)
Please note that China’s share of the world’s overall GDP of $141.860 trillion was 20.8% at January 2020, up from 20.2% one year earlier.
Even after factoring in its vast population, China’s GDP per capita income of $10,872 is much less than the global average GDP per person of $18,391.
China’s Lagging Business Cycle Indicators
Turning to the lagging business indicators, China’s capital investment dropped while its inflation rate accelerated year over year.
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator that records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Based on history, capital investment typically lags GDP peaks and valleys by about 12 months. On the other hand, inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 42.54% in 2020 (down -0.892% from 43.432%)
- Unemployment rate: 3.8% in 2020 (no change from 2019)
- Inflation rate: 2.432% in 2020 (up 0.127% from 2.305%)
China’s reported unemployment remains unchanged. Unemployment rate is a crucial percentage based on a country’s total labor force (not its full population) since it profoundly impacts how many debtors can afford to pay their mortgages and other borrowings.
Inflation is rising for China, albeit in relatively small increments. The inflation rate documents the percentage change in average consumer prices in a country over a one-year period.
Research Reference Materials:
Forbes, Recession Is Overdue By 4.5 Years, Here’s How To Prepare. Accessed on February 26, 2020
The Conference Board, Global Consumer Confidence Unchanged in Q3. Accessed on February 26, 2020
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on February 26, 2020
theGlobalEconomy.com, Retail sales Y-on-Y by country. Accessed on February 26, 2020
Trading Economics, China Passenger Car Sales. Accessed on February 26, 2020
Wikipedia, Consumer confidence index. Accessed on February 26, 2020