- GDP growth of 0.8% qoq in the second quarter versus 2.2% in the first quarter shows slowing momentum
- Q2 GDP grew 6.3% yoy due to minor base effects
- Weak data increases urgency to announce further policy moves
- Policy makers refrained from aggressive stimulus measures due to debt risks
BEIJING, July 17 (Portal) – China’s economy grew slowly in the second quarter as domestic and overseas demand slowed, post-COVID momentum slowed quickly and pressure mounted on policymakers to provide more stimulus to stimulate economic activity.
The Chinese authorities face a daunting task of keeping the economic recovery on track and containing unemployment as aggressive stimulus measures could exacerbate debt risks and structural distortions.
Gross domestic product grew just 0.8% in April and June quarter-on-quarter on a seasonally adjusted basis, data released by the National Bureau of Statistics on Monday showed, contrary to expectations of a rise by analysts in a Portal poll 0.5% growth of 2.2% in the first quarter.
Year-on-year, GDP grew 6.3% in the second quarter, accelerating from 4.5% in the first three months of the year, but the rate was well below the 7.3% growth forecast.
The annual pace was the fastest since the second quarter of 2021 but was severely distorted by the economic woes brought on by strict COVID-19 lockdowns in Shanghai and other major cities last year.
“The data suggests that China’s post-COVID boom is clearly over,” said Carol Kong, economist at the Commonwealth Bank of Australia in Sydney.
“Higher-frequency indicators are ahead of May numbers but still paint a picture of a bleak and faltering recovery while youth unemployment hits record highs.”
More recent June data, released alongside GDP numbers, showed China’s retail sales grew 3.1%, slowing significantly from a 12.7% increase in May. Analysts had expected growth of 3.2%.
Industrial production growth accelerated unexpectedly to 4.4% last month from 3.5% in May, but demand remains subdued.
Private fixed investment contracted 0.2% in the first six months, in sharp contrast to the 8.1% growth in government investment, indicating weak private sector confidence.
Recent data showed a rapidly faltering post-COVID recovery as exports fell at their fastest pace in three years on softening domestic and international demand, while a prolonged downturn in the key real estate market has weighed on confidence. Weak overall momentum has raised expectations that policymakers will need to do more to prop up the world’s second largest economy.
Authorities are likely to take more stimulus measures, including tax spending to fund major infrastructure projects, more support for consumers and private businesses, and some easing of housing policies, political insiders and economists said.
However, analysts say a quick turnaround is unlikely.
All eyes are on an expected Politburo meeting later this month, at which leaders could set the policy course for the rest of the year.
“NO SILVER BULLET”
Asia stocks fell while the Chinese yuan fell after the disappointing data.
While China is on track to meet its modest growth target of around 5% for 2023, some analysts see the risk of missing the target.
“It was a pretty disappointing read at just 6.3%, so momentum is clearly flagging,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.
“Now, at this rate of deceleration, the real risk is that the growth target may not be met – that 5% may not be met if the economy continues to slow at this rate. So I think that increases the urgency for more political support soon.”
China’s economy grew just 3% last year due to the COVID containment measures, well short of the official target.
Most analysts believe policymakers are unlikely to embark on aggressive stimulus amid concerns about mounting debt risks.
However, a stronger slowdown could lead to more job losses and deflationary risks, further eroding private sector confidence, they said.
The youth unemployment rate rose to 21.3% in June from 20.8% in May, a new record as graduates sought limited opportunities while job hunting.
China’s real estate sector, which accounts for about a quarter of the economy, remains on a sharp downtrend, with new home prices faltering in June.
According to Portal calculations, real estate investment fell 20.6% year-on-year in June after falling 21.5% in May.
A senior central bank official said on Friday that the bank will use policy tools like the reserve requirement ratio (RRR) and medium-term borrowing facility to deal with economic challenges.
Last month, the central bank cut interest rates by a modest 10 basis points.
Some economists blame the “scarring effects” that years of tough COVID measures and government restrictions have caused in the real estate and tech sectors – despite recent official efforts to lift some restrictions to shore up the economy.
Some economists have pointed to the risk of a balance sheet recession as Chinese households and private businesses build savings and scale back borrowing and spending after three years of COVID containment.
“We expect monetary easing and targeted fiscal support to key industries, including real estate and construction, in the coming months,” Goldman Sachs economists said in a statement.
“But this additional support will not be a panacea. 2023 is increasingly looking like a year to forget for China.”
Reporting by Kevin Yao, Ellen Zhang and Joe Cash. Edited by Shri Navaratnam
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