(Bloomberg) — China’s disappointing economic growth data prompted several economists to downgrade their forecasts for the year, citing major weaknesses in the recovery and Beijing’s relatively subdued stimulus response.
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JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. were among the banks that cut their economic growth forecasts to 5% this year, jeopardizing Beijing’s official gross domestic product target of around 5%.
Official data released on Monday showed that the economy lost momentum in the second quarter, with consumer spending growth weakening particularly in June and real estate investment contracting.
Here’s a rundown of economists’ main conclusions following the data’s release:
GDP growth target in jeopardy
Economists from Citigroup Inc. lowered their forecast for GDP growth this year from 5.5% to 5%, as Beijing’s official target – set at around 5% in March – was now in jeopardy.
The new projection takes into account “more realistic” policy support for the coming months, the economists, including Yu Xiangrong, wrote. They said while a meeting of the Communist Party’s Politburo later this month will provide guidance on policy thinking, there are risks that policies “fall behind or fall short of expectations.”
JPMorgan lowered its forecast from 5.5% to 5%, while Morgan Stanley lowered its estimate from 5.7% to 5%. United Overseas Bank Ltd., Capital Economics Ltd. and Societe Generale SA lowered their forecasts.
No major policy stimulus package on the way
Investors should adjust their expectations for a “quick, all-heal package” of stimulus, according to Nomura Holdings Inc. Chief China Economist Lu Ting.
“We don’t think today’s data will prompt Beijing to ramp up stimulus,” he said, though Nomura kept its 2023 GDP forecast at 5.1% growth.
While Lu expects Beijing to take a number of supportive measures, including two 10 basis point policy rate cuts and additional fiscal transfers to local governments, he said “these measures may not change things”.
Lu cited challenges including weak confidence, the collapse of land sales as a source of income creating a “massive fiscal cliff”, along with “clogged transmission channels, a dwindling toolbox” and “sluggish economic decision-making”.
Frederic Neumann, chief Asian economist at HSBC Holdings Plc., said boosting demand at this point “could prove counterproductive by fueling debt build-up and accentuating some of the economy’s imbalances, such as the dependence on a huge housing sector.”
According to Zerlina Zeng, senior credit analyst at CreditSights, budget constraints from local governments may be another limiting factor.
The recovery of the real estate market is essential for growth prospects
Beijing will have to revive the housing market to see better growth in the economy, said Jacqueline Rong, chief economist for China at BNP Paribas SA.
“The only engine of growth left is investment, the biggest problem of which is ownership,” Rong said. “The most urgent support needed for real estate is stabilizing the supply side – too many developers have been in trouble and large-scale defaults cannot happen or housing construction grinds to a halt.”
Consumer confidence is declining
Monday’s data showed a marked slowdown in retail sales growth – the June figure grew 3.1% from the previous year. That was worrying, says Louis Kuijs, chief economist Asia-Pacific at S&P Global Ratings.
“What we all expected was a recovery based on consumption and service. If that sputters, there is no engine for the recovery anymore,” Kuijs said, nodding to concerns about problems in exports – which have been a driver of growth in recent years – and in real estate.
“If both exports and real estate are weak, it means we can’t expect too much on the industrial side,” said Kuijs.
Youth unemployment continues to rise
China’s youth unemployment rate, which has topped 20% for a third consecutive month, could rise even higher in July, government officials warned Monday. It is expected to cool down after the summer – traditionally the high time for unemployment among young people, when they have graduated and are looking for work.
“Youth unemployment is more of a structural problem,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. He added that the government is likely to take more targeted measures to address that problem, rather than “general stimulus”, including rate cuts.
The risk of deflation is now real
Concerns about deflation intensified last week after China reported no consumer price growth and a 5.4% contraction in producer prices in June. Monday’s data showed that the GDP deflator, a measure of prices for the entire economy, turned negative in the second quarter for the first time since 2020. The deflator is calculated as the difference between the nominal GDP growth rate and the inflation-adjusted rate.
The “risk of deflation is serious,” said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management.
–With help from Rebecca Choong Wilkins and Yujing Liu.
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