China’s weak GDP growth in the second quarter raises the urgency for more policy support

BEIJING (Reuters) – China’s economy grew at a subdued pace in the second quarter as demand at home and abroad weakened, with post-coronavirus momentum faltering rapidly and increasing pressure on policymakers to deliver more stimulus to support activity.

Chinese authorities face an uphill task trying to keep the economic recovery on track and put a lid on unemployment, as any strong stimulus could fuel debt risks and structural distortions.

Data released by the National Bureau of Statistics on Monday showed that gross domestic product grew just 0.8% in the April-June period compared to the previous quarter, on a seasonally adjusted basis, against analysts’ expectations in a Reuters poll for a 0.5% increase and compared to an expansion of 2.2% in the previous quarter. First Quarter.

On an annual basis, gross domestic product expanded 6.3% in the second quarter, accelerating from 4.5% in the first three months of the year, but the rate was well below expectations for growth of 7.3%.

The annual pace was the fastest since the second quarter of 2021, but it was skewed sharply by the economic pain caused 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, an economist at the Commonwealth Bank of Australia in Sydney.

“Indices with higher frequencies are up from the May numbers, but still paint a picture of a dismal and faltering recovery at the same time youth unemployment is reaching record levels.”

Some economists say the latest data increases the risk that China will miss its modest growth target of 5% for 2023.

Timely June data, released alongside GDP figures, showed China’s retail sales grew 3.1%, slowing sharply from a 12.7% jump in May. Analysts had expected a growth of 3.2%.

Industrial output growth unexpectedly accelerated to 4.4% last month from 3.5% in May, but demand remains tepid.

Private investment in fixed assets shrank by 0.2% in the first six months, in sharp contrast to investment growth by state entities of 8.1%, indicating weak confidence in private business.

Recent data showed a rapid post-COVID recovery as exports fell by the most in three years due to slumping demand at home and abroad while a prolonged downturn in the prime real estate market sapped confidence.

Weakening overall momentum and risks of a global recession have raised expectations that policymakers will need to do more to support the world’s second largest economy.

The authorities are likely to roll out more stimulus steps including fiscal spending to fund large infrastructure projects, more support for private consumers and businesses, and some easing in property policy, policy insiders and economists said.

But analysts say a rapid turnaround is unlikely.

All eyes are on the expected Politburo meeting later this month, when senior leaders can chart the course of policy for the rest of the year.

There is no “silver bullet”

Asian stocks fell, while the Chinese Yuan fell after the disappointing data.

While China is seen on track to achieve its modest growth target for 2023, there are risks of missing the annual target for the second year in a row.

“It was quite a disappointing number at just 6.3%, and clearly the momentum is slowing,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Singapore.

“At this pace of slowdown, there is now a real risk that the growth target will be missed – and that 5% may not be achieved if the economy continues to slow at this pace. So I think that adds to the urgency of more policy support soon. “

China’s economy grew just 3% last year due to COVID restrictions, vastly exceeding the official target.

Most analysts say policy makers are unlikely to provide any strong stimulus due to concerns about growing debt risks.

However, a deeper slowdown could fuel more job losses and fuel downturn risks, further undermining 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 scrambled for limited offers during the job-hunting season.

China’s real estate sector, which accounts for about a quarter of the economy, remains firmly on a downward trend, with June new home prices stalling.

Real estate investment fell 20.6% in June on an annual basis after falling 21.5% in May, according to Reuters calculations.

A senior central bank official said on Friday that the bank will use policy tools such as the reserve requirement ratio and the medium-term lending facility to tackle economic challenges.

Last month, the central bank cut benchmark lending rates by 10 basis points.

Some Chinese observers have blamed “scarring effects” from years of strict COVID measures and regulatory restrictions on the real estate and technology sectors – despite recent official efforts to reverse some of the restrictions to prop up the economy.

A few economists have pointed to the risks of a balance sheet recession, as Chinese households and private firms build up their savings and reduce borrowing and spending after three years of COVID restrictions.

“We expect to see monetary policy easing in the coming months, and targeted fiscal support to key industries, including real estate and construction,” economists at Goldman Sachs said in a note.

“But this additional support will not be a panacea. Increasingly, 2023 is looking like a year to forget for China.”

Additional reporting by Kevin Yau, Elaine Zhang and Joe Cash; Editing by Shri Navaratnam

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