In the second quarter of the year, China’s GDP growth fell sharply to 0.7% quarter-on-quarter from 1.5% in the previous quarter, putting the annual growth target of 5% at risk. The primary driver of this slowdown was supply outperforming domestic demand, with the export outlook becoming cloudy due to rising trade tensions. With monetary policy options limited, fiscal and housing policies are expected to play a crucial role in stimulating the economy. Standard Chartered Economist Hunter Chan predicts that there will likely be measured rate and reserve requirement ratio (RRR) cuts once the prospects of a rate cut by the Federal Reserve become clearer.
The growth deceleration in Q2 was evident in various data points, with GDP growth coming in at 4.7% year-on-year, below market consensus of 5.1% and down from the 5.3% growth recorded in the first quarter. Nominal GDP saw a 4.0% year-on-year expansion, with deflationary pressures keeping the deflator in negative territory. Despite this slowdown, forecasts for 2024 GDP growth remain at 4.8%, based on expectations of monetary easing and increased fiscal support.
China’s growth drivers are experiencing disparities, with industrial production showing robust growth of 5.3% year-on-year in June, while retail sales and services production growth slowed to 2% and 4.7% year-on-year, respectively. Property investment continued to decline by around 10% year-on-year. Additionally, trade tensions are escalating, with the imposition of new tariffs on Chinese electric vehicles by the United States and the European Union. More tariffs are expected after the US elections in November, further adding to economic uncertainties.
The upcoming meeting of the Politburo in late July is likely to focus on boosting domestic demand through concrete measures. This could involve increasing fiscal spending by fully utilizing bond issuance proceeds and addressing the issue of housing inventory. Forecasts anticipate a 10 basis points policy rate cut in both the third and fourth quarters of the year, along with a 25 basis points cut in the reserve requirement ratio (RRR) in the third quarter. These policy measures aim to support economic growth and navigate the challenges posed by trade tensions and domestic demand dynamics.
In conclusion, China’s GDP growth decelerated in the second quarter, posing risks to the annual growth target. Trade tensions and uneven growth drivers are contributing to economic uncertainties. To stimulate the economy, fiscal and housing policies are expected to take the lead, as monetary policy options remain limited. Concrete measures to boost domestic demand are anticipated to be announced following the Politburo meeting in July, with rate cuts and reserve requirement ratio reductions on the horizon. Moving forward, navigating through external pressures and domestic challenges will be crucial for sustaining economic growth in China.
