China’s growth disappoints as Beijing points to muted stimulus – Yahoo Finance

(Bloomberg) — China’s economic recovery lost momentum in the second quarter, jeopardizing Beijing’s growth target for the year and raising concerns about a slowdown in the global economy.

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Gross domestic product grew at a slower than expected pace of 6.3% in the second quarter compared to a year earlier when dozens of Chinese cities were in lockdown, but just under 1% from the first quarter. Deflation is now a major risk, the data showed, with economy-wide prices falling for the first time since 2020, while youth unemployment rose above 21%.

The data reinforced calls for more stimulus for China’s economy, with focus now shifting to a meeting later this month of the Communist Party’s Politburo, which will set economic policy for the rest of the year. However, Beijing has hinted that stimulus measures are likely to be limited this year, reflecting its relatively modest growth target of around 5% for the year.

Even that target is now at stake, according to economists at Citigroup Inc., who have cut their forecast for China’s growth this year from 5.5% to 5%. Morgan Stanley cut its projection from 5.7% to 5%, while UOB Ltd. and JPMorgan Chase & Co. will see the same growth this year, lower than previous estimates of 5.6% and 5.5% respectively.

June data released by the National Bureau of Statistics showed a slowdown in growth in consumer spending, which has been the main driver of China’s economy this year. Retail sales rose 3.1% in June from a year earlier, up from 12.7% in May.

“What we all expected was a recovery based on consumption and service. If that sputters, there is no engine for the recovery anymore,” said Louis Kuijs, chief economist Asia-Pacific at S&P Global Ratings. “We never want to read too much into a month’s data. But if the consumption figures from June are representative, then that is not a good sign.”

To account for the base effects of last year’s lockdowns, economists have focused on quarterly and two-year average growth rates. Both measures showed a slowdown in the second quarter compared to the first three months of the year.

Investment by China’s huge real estate sector also deteriorated in June from the previous month, a sign of continued pain in the housing market.

“Real estate is the key to solving the various current problems,” said Jacqueline Rong, chief economist China at BNP Paribas SA. “The central bank needs to put a floor to the credit crunch among developers to help them survive.”

China’s benchmark CSI 300 Index of equities closed 0.8% lower on Monday, while Asian counterparts fell overall. It was the index’s first drop in three sessions. The onshore yuan weakened 0.46% to 7.1742 per dollar as of 3:51 p.m. local time.

Finance ministers and central bank governors of the Group of 20 countries meet in India this week amid slowing global growth. The global economy is expected to grow at 2.8% this year, slower than its pre-pandemic pace, and recent high-frequency indicators point to weakness in manufacturing, the International Monetary Fund said last week.

While speculation has increased that Beijing will stimulate the economy more, officials are reluctant to ramp up debt, especially in the real estate sector. This suggests that any support measures may be smaller than in previous years and targeted at specific industries.

What Bloomberg Economics Says…

Picking up industrial production points to some stabilization in the manufacturing sector, a sign that the growth engine of the economy is shifting from consumption to production. But weakening domestic and foreign demand is an obstacle to sustaining the recovery. The weak data argues for more policy support.

Chang Shu and David Qu

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The People’s Bank of China, which cut its key policy rate in June, refrained from easing policy on Monday, though many analysts expect a move in the coming months.

“We expect Beijing to introduce a series of supportive measures in the second half of the year, including two rate cuts of 10 basis points,” said Lu Ting, chief economist for China at Nomura. “However, these measures cannot change things.”

Underlining the weak sentiment, fixed investment by private firms declined in June and the household saving rate remains high.

The GDP deflator, a measure of prices across the economy, turned negative in the second quarter for the first time since 2020. The “risk of deflation is serious,” said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management.

The NBS put a positive spin on the data, saying it showed “good momentum” and used variations of the word “stable” or “stability” to describe the numbers. Still, it said, “The foundations for recovery and development of the domestic economy are still not solid.”

Xing Zhaopeng, a senior China strategist at Australia & New Zealand Banking Group Ltd., said the lack of data could prompt officials to accelerate fiscal spending to boost investment.

“There have been many signals, including conferences between the government and foreign investors and entrepreneurs, suggesting follow-up policies,” he said. “Fiscal spending will be the main focus for the next two weeks.”

Economists from Goldman Sachs Group Inc. said the size of any stimulus is likely to be smaller than in previous recessions, while HSBC Holdings Plc’s Frederic Neumann said the support will be targeted rather than broad-based.

“An overstimulation of demand in the near term could prove counterproductive by fueling debt build-up and accentuating some of the economy’s imbalances, such as its dependence on a huge housing sector,” said Neumann, Asia’s chief economist. HSBC. The focus remains on “putting the economy on a long-term sustainable trajectory,” he said.

–With help from Jill Disis, Lucille Liu, Wenjin Lv, and Yihui Xie.

(Updates with GDP downgrades from the first paragraph.)

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