Minsheng Taochuan: Economic slowdown in October, should policies stabilize investment or stabilize consumption?

In October, the growth rates of industry, investment, and consumption slowed down, indicating that the headwinds for the economy in the fourth quarter have increased compared to the third quarter. Based on the industrial added value and the service production index, the GDP growth rate at the start of the fourth quarter has dropped to around 4.7%. To achieve the annual economic growth target, unless exports accelerate at the end of the year, we need to see stabilization in investment or consumption in the next two months.

However, the growth rate of social retail sales in October (2.9%) has declined to the level before last year's "two new" initiatives, and the growth rate of fixed asset investment (-11.4%) has fallen to a five-year low, indicating that under the influence of the real estate downturn and "anti-involution" policies, the willingness of residents to consume and the willingness of local governments to invest need to be improved. The fact that there was no increase in fiscal deposits compared to the previous year also serves as evidence.

So, should we stabilize investment or stabilize consumption? Based on historical experience, except for the special transition period of supply-side structural reform in 2015-16, during the global financial crisis of 2008-09 and the public health crisis of 2020-21, investment growth rebounded first and led to economic stabilization. Therefore, from now until the first quarter of next year, we expect investment to be more effective in the short term. Stabilizing investment will focus more on the two 500 billion injections (policy financial instruments and local government debt limits) and the connection with next year's fiscal budget being implemented earlier, while stabilizing residents' consumption will depend on clearer paths for stabilizing real estate and promoting consumption next year.

Industry: Under the dual pressure of "anti-involution" and "stabilizing foreign trade," the slowdown in industrial production is greater than seasonal factors. Both the low manufacturing PMI and the declining exports indicate a slowdown in industrial production in October. Year-on-year, the growth rate of industrial production slowed from 6.5% in September to 4.9% in October, influenced by fewer working days this October compared to last year; month-on-month, industrial production typically slows seasonally in October (affected by the "Eleventh" holiday, marginally fewer working days, and some demand being released in advance before the holiday), but this year's slowdown is greater than historical averages. Manufacturing: Although the growth rate has dropped to its lowest point since 2020, it is expected to stabilize during the economic transition period over the next two years. Since the U.S. imposed additional tariffs in April, the year-on-year growth rate of manufacturing investment has been in a downward channel, with the decline in October expanding from -1.9% in September to -6.7%. Currently, private investment in manufacturing remains weak overall, but signs of a turning point are beginning to emerge. The subsequent recovery of effective demand and external uncertainties, as well as further stabilization of corporate investment momentum, are crucial. **Infrastructure: In balancing debt reduction and growth, Infrastructure investment is experiencing a "deceleration shift." In October, the growth rate of narrow infrastructure investment further declined from -4.6% in September to -8.9%. Coupled with the seasonal decline in asphalt operating rates, it confirms that the current infrastructure prosperity remains low. Considering that fiscal resources have continued to tilt towards resolving hidden debt risks this year, the cooling of the investment side is not surprising. It is worth noting that the proportion of newly issued special bonds directed towards the infrastructure sector has recently begun to rise again, indicating that the turning point for infrastructure investment may be approaching. Consumption: The growth rate of retail sales has slightly slowed, and the preemptive "Double Eleven" effectively offsets the weakening momentum of "trade-in." In October, the growth rate of retail sales fell slightly to 2.9%, the lowest since August last year. The reasons include the high base effect from the same period last year (which was the peak growth rate for the year) and the close relationship with the decline in growth momentum of "national subsidies" after the consumption of funds. It is noteworthy that this year's preemptive "Double Eleven" partially offset the weakening effect of the "trade-in" policy. This year's "Double Eleven" promotional activities started 5 days earlier than in previous years, which meant that despite multiple pressures, the decline in the growth rate of retail sales in October did not significantly widen. However, overall, subsequent consumption still faces considerable pressure, and there is an urgent need for incremental policies to accelerate implementation and effectiveness. Real Estate: The elevated base combined with weak demand indicates that real estate policies in the fourth quarter need to be further strengthened. ** From January to October, the cumulative growth rate of real estate investment continued to decline, dropping to -14.7% (previous value was -13.9%). On one hand, the new real estate policies last year led to a concentrated release of housing demand, raising the base for the fourth quarter and significantly suppressing the real estate market this year; on the other hand, the effects of previous demand overextension have continued to show, with flat performance in commodity housing sales since July. Therefore, subsequent policies to stabilize the housing market need to be further strengthened, focusing on promoting market supply-demand balance and driving the real estate industry towards high-quality development. Article authors: Tao Chuan, Zhong Yumei, Wu Shuo, Source: Chuan Yue Global Macro, Original title: "October Economic Slowdown: Stabilizing Investment or Stabilizing Consumption?"

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