Daily Management Review

China's Fragile Q2 GDP Growth Highlights The Need For Additional Policy Backing


China's Fragile Q2 GDP Growth Highlights The Need For Additional Policy Backing
The second quarter saw China's economy expand at a sluggish rate due to weak domestic and international demand. As a result, pressure on officials to provide additional stimulus to support activity increased.
It will be difficult for Chinese policymakers to maintain the economic recovery and contain unemployment since any excessive intervention could increase debt risks and structural distortions.
According to data released by the National Bureau of Statistics on Monday, the gross domestic product expanded by just 0.8% in April-June compared to the prior quarter on a seasonally adjusted basis, which was lower than the 0.5% increase predicted by analysts in a Reuters poll and lower than the 2.2% expansion in the first quarter.
The GDP increased 6.3% year over year in the second quarter, up from 4.5% in the first three months of the year, although the rate fell far short of the predicted 7.3% growth.
Although it was significantly distorted by the economic hardship brought on by the strict COVID-19 lockdowns in Shanghai and other large cities last year, the yearly pace was the fastest since the second quarter of 2021.
"The data suggests that China's post-COVID boom is clearly over," said Carol Kong, economist at Commonwealth Bank of Australia in Sydney.
"The higher-frequency indicators are up from May's numbers, but still paint a picture of a bleak and faltering recovery and at the same time youth unemployment is hitting record highs."
Some experts believe the most recent data increases the likelihood that China will miss its modest 5% growth target for 2023.
Along with the GDP figures, more recent data revealed that China's retail sales increased by 3.1% in June, a marked slowdown from the 12.7% increase in May. Analysts anticipated 3.2% growth.
Demand remained moderate despite an unexpected acceleration in industrial output growth last month, which went from 3.5% to 4.4%.
In contrast to the 8.1% growth in investment by governmental bodies, private fixed-asset investment fell by 0.2% in the first half of the year, indicating low business confidence.
Recent data showed a fast stalling post-COVID recovery as exports dropped to their lowest level in three years as demand slowed both domestically and overseas and confidence was undermined by a protracted slide in the crucial real estate sector.
The likelihood of a worldwide recession and the sluggish overall momentum have increased concerns that policymakers will need to take additional action to support the world's second-largest economy.
According to policy experts and analysts, the government is likely to implement additional stimulus measures, including fiscal spending to pay for expensive infrastructure projects, increased support for consumers, and a loosening of the property policy.
Analysts believe that a swift reversal is improbable.
All eyes are on the Politburo meeting that is anticipated for later this month, when top officials might set the direction of policy for the remainder of the year.
After the dismal statistics, Asian stocks fell and the Chinese yuan softened.
While it appears that China will achieve its modest growth goal for 2023, there is a chance that the annual objective will be missed for the second consecutive year.
"It was quite a disappointing number at just 6.3%, so clearly the momentum is slowing down," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.
"At this pace of deceleration, there's now actually a risk that the growth target may not be achieved - this 5% may not be achieved if the economy continues to decelerate at this pace. So I think this does raise greater urgency for more policy support soon."
Due to COVID limitations, China's economy grew by barely 3% last year instead of the stated 7%.
According to the majority of analysts, officials' concerns about rising debt risks prevent them from implementing any substantial intervention.
A deeper recession, however, may fuel deflationary concerns and ignite additional job losses, further eroding private-sector confidence, they warned.
The youth unemployment rate increased to a new high of 21.3% in June from 20.8% in May as graduates competed for few job offers during the hiring season.
With new home prices stagnating in June, China's property industry, which makes up nearly a fifth of the country's economy, is still firmly in a downward trend.
Reuters calculations show that real estate investment fell 20.6% in June compared to the same month last year, following a decline of 21.5% in May.
A top central bank official stated on Friday that the bank will weather economic headwinds by using policy tools including the reserve requirement ratio (RRR) and medium-term loan facility.
The central bank modestly reduced its benchmark lending rates by 10 basis points last month.
Despite recent official moves to remove some limits to help the economy, some China observers have blamed the property and technology industries for the "scarring effects" generated by years of stringent COVID policies and regulatory curbs.
A few economists have warned of the possibility of a balance sheet recession as, following three years of COVID restraints, Chinese consumers and private businesses increase savings and decrease borrowing and expenditure.
"We expect to see monetary policy easing in coming months and targeted fiscal supports given to key industries, including real estate and construction," Harry Murphy Cruise, economist at Moody’s Analytics, said in a note.
"But that extra support won’t be a silver bullet. Increasingly, 2023 is looking like a year to forget for China."