China's Economic Slowdown Fuels Stimulus Expectations
The second-largest economy's growth falls short of forecasts, highlighting ongoing challenges and reinforcing the need for more economic stimulus measures.
Published July 16, 2024 - 00:07am
China's economy has experienced a pronounced slowdown in the second quarter, missing forecasted growth rates and prompting predictions for further stimulus measures. Official data reveals an economic growth of 4.7% from April to June, falling short of the anticipated 5.1% as estimated in a Reuters poll. This marks the slowest growth since the first quarter of 2023 and demonstrates a decline from the previous quarter's 5.3% expansion.
A major concern highlighted by analysts is the downturn in the consumer sector, where retail sales growth has plummeted to an 18-month low. This sharp decline is attributed to deflationary pressures forcing businesses to reduce prices on a wide range of products, including cars, food, and clothing. Lynn Song, chief economist for Greater China at ING, underscored the difficulty in achieving the government's ambitious target of 5% growth for 2024 due to these challenges.
The property market crisis, which has persisted for years, continues to exacerbate the economic slowdown. In June, new home prices saw their fastest decline in nine years, heavily impacting consumer confidence and limiting local governments' ability to generate revenue through land sales. As local governments grapple with mounting debt, the property downturn further strains fiscal resources.
Economic growth in China has been uneven, with industrial output outpacing domestic consumption. This imbalance fuels deflationary risks amid the ongoing property downturn and expanding local government debt. Although China's exports have offered some support, rising trade tensions present a new set of challenges. Data from June indicated exports increased by 8.6% year-on-year, while imports unexpectedly fell by 2.3%, as manufacturers rushed orders to circumvent tariffs from trade partners.
The disappointing GDP data has led to a downward revision of growth forecasts by significant financial institutions. For instance, Goldman Sachs recently adjusted its forecast for China's 2024 growth from 5.0% to 4.9%, emphasizing the need for more policy easing, especially in fiscal and housing sectors. Similarly, Citi analysts predict another wave of property-supporting measures following the upcoming Politburo meeting in late July.
One of the critical aspects of China's economic dilemma is the negative wealth effect from declining property and stock prices. Additionally, low wage growth, driven by cost-cutting measures across various industries, has curtailed consumer spending. This has resulted in a pivot from large-scale purchases to basic consumption, focused on essential items like food and drink.
The National Bureau of Statistics (NBS) has acknowledged the adverse impacts of bad weather on growth in the second quarter. Nonetheless, the economy faces increasing external uncertainties and domestic difficulties heading into the second half of the year. The data also revealed that property investment fell by 10.1% in the first half of 2024 compared to the previous year, with home sales by floor area dropping by 19.0%. The stalling demand for bank loans in June further underscores the economic challenges, with some key lending metrics hitting record lows.
Despite the gloomy outlook, China's central bank governor has reiterated a commitment to a supportive monetary policy stance. Analysts expect a 10-basis point cut in China's one-year loan prime rate and a 25-basis point reduction in the banks' reserve requirement ratio during the third quarter as part of these supportive measures. Furthermore, the government has already taken steps to bolster the property market, allowing local state-owned enterprises to purchase unsold completed homes. The central bank also introduced a 300 billion yuan relending loan facility to support affordable housing initiatives.
The forthcoming third plenum and Politburo meeting are critical events, where China's leadership seeks to restore economic confidence. However, the conflicting objectives of stimulating growth and reducing debt present a complex challenge. Moody's Analytics economist Harry Murphy Cruise points out that substantial policy shifts could signify failure and lead to a loss of face, proposing that any reforms will likely be modest to maintain credibility. Nevertheless, he remains cautiously optimistic that China could achieve its approximate 5% growth target for the year with these incremental adjustments.
In summary, China's struggle to balance growth and stability amid external and internal pressures suggests that more stimulus measures are on the horizon. The nation's economic performance in the upcoming quarters will be pivotal in determining whether these measures can adequately address the multifaceted challenges it faces.