China: robust growth in real GDP at the start of the year

In line with our expectations, Chinese real GDP grew strongly at the start of the year as economic activity was frontloaded to avoid tariff hikes. This is illustrated by a 12.7% y/y jump in exports in March and a 7.7% y/y gain in industrial production. However, this pace of growth is probably unsustainable in the longer term as the effective US tariff rate on total imports from China now stands at 94.3%. With around 16% of Chinese exports bound for the United States, the decoupling of the two largest economies will inevitably harm real GDP growth in both countries. Among the first signs of this possible deceleration were the 4.5% y/y fall in Chinese imports in March, and the decline in the PMI activity expectations indexes.

As for domestic demand, which has been held back for several years by the real estate crisis and very low confidence, the situation seems to be improving. The first signs of stabilization in house prices and a decent rise in retail sales in March could prove to be important assets in the midst of a trade war.

China's strong real GDP growth is likely to be short-lived, as the effects of frontloading economic activity fade and the consequences of the trade war start to be felt. This comes at a particularly delicate time for China, as domestic demand is finally showing signs of recovery. Against this backdrop, we expect the central government to push ahead with further stimulus measures. However, financial constraints due to the government's high level of debt will not allow the deployment of a “fiscal bazooka” similar to the policies used during the 2008 financial crisis.