China’s GDP growth beats forecasts in Q1, but concerns linger over base metals’ outlook
China's Q1 2024 GDP growth of 5.3% exceeds expectations; however, analysts foresee challenges in achieving the 5% growth target for 2024 due to weak domestic demand. Any revival in the Chinese property market will certainly boost the demand for base metals.
China, the world's second largest economy, has reported a robust economic growth rate of 5.3% for the first quarter of 2024, surpassing analysts' expectations. On a QoQ basis, GDP grew 1.6% in the January-March period.
The expansion was bolstered by rapid growth in the services sector and increased overseas demand, which fueled export growth in the industrial sector. Analysts attribute these positive figures to continuous policy support from the Chinese government aimed at bolstering demand.
However, challenges remain, particularly regarding household confidence and the real estate sector. These challenges highlight that while GDP growth came well above the analysts estimates, domestic demand remains weak.
China has set an ambitious economic growth target of around 5% for 2024, a goal that analysts view as requiring additional stimulus measures to achieve. In addition to the GDP data, China's release of March indicators—property investment, retail sales, and industrial output—underscored the persistent weakness in domestic demand.
Despite monetary and fiscal measures aimed at revitalising the property market, recent data shows little improvement, as evidenced by the continued decline in home prices.
China's primary market saw home prices drop for the 10th consecutive month in March, signaling that government interventions to support struggling developers and boost consumer confidence have been insufficient to halt the downturn.
Efforts by Chinese authorities earlier this year included injecting more funds for weak developers and reducing interest rates on home mortgages. However, these measures have not yet yielded the expected results to boost the domestic demand.
Further, retail sales growth, a key indicator of consumption, rose by 3.1% year-on-year in March, below the forecasted increase of 4.6% and slower than the 5.5% gain in the January-February period, as per Reuters.
Property investment, on the other hand, recorded a significant decline of 16.8% year-on-year in March, worse than the 9.0% drop observed in January-February, while sales plummeted by 23.7%, compared to a 20.5% fall in the first two months of the year.
Domestic demand dynamics shape metals' outlook
China's significant role in global commodity markets highlights the importance of its domestic demand dynamics, particularly in the property market, for shaping the outlook of industrial metals.
As the largest consumer of base metals, accounting for approximately 50% of global output, any revival in China's domestic demand is poised to have a significant impact on base metals.
In 2023, the prices of most industrial metals saw modest gains as the property market in China struggled to revive despite policy measures being announced. Additionally, other challenges, such as geopolitical tensions in the Middle East and the ongoing conflict between Russia and Ukraine, have exerted downward pressure on base metal prices.
However, in recent weeks, base metal prices have surged to multi-month highs, propelled by the robust recovery in manufacturing sectors across major economies such as the US, Germany, and the UK during March. China's manufacturing sector also witnessed significant expansion in the prior month.
Additionally, supply constraints have provided further support for the upward trajectory of base metal prices. Nevertheless, the rally in base metals in the following months will depend on the revival in domestic demand in China.
If Chinese authorities announce further stimulus, it may help in a revival in domestic demand, particularly in the property market. This resurgence is poised to serve as a catalyst for base metals.
Clouds loom over rate cuts
Aside from the revival of China's domestic demand, the trajectory of base metal demand hinges on the prospect of U.S. Federal Reserve rate cuts. Recent data shows a 0.7% uptick in U.S. retail sales in March, surpassing market forecasts of 0.3%.
These figures contribute to a macroeconomic landscape suggesting a postponement of the previously anticipated interest rate reductions by the Federal Reserve, bolstered by a robust jobs report and heightened inflation figures.
Previously, expectations of rate cuts in the U.S. had supported base metal demand at the outset of the year. Any delay in these cuts by the Fed could potentially stall the ongoing rally in base metal prices.
The prices of aluminum, nickel, and copper saw significant spikes in the preceding trading session following the joint U.S. and UK ban on new Russian supplies of these metals to the London Metal Exchange.
However, it's worth noting that these restrictions may not entirely impede Russia from selling metals elsewhere or prevent the majority of global metal trade, which largely occurs outside the realm of exchanges, directly involving miners, traders, and manufacturers.
Disclaimer: We advise investors to check with certified experts before taking any investment decisions.
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