China’s weak GDP growth in the 2nd quarter increases the need for more political support

  • GDP grows 0.8% q/ki Q2, against 2.2% in Q1, shows slowing pace
  • GDP increases by 6.3% y/y in the 2nd quarter due to low base effects
  • Fragile data increases the need to disclose more policy steps
  • Policymakers have seen to avoid aggressive stimulus because of debt risk

BEIJING, July 17 (Reuters) – China’s economy grew at a flimsy pace in the second quarter as demand weakened at home and abroad, with post-COVID momentum faltering rapidly and increasing pressure on policymakers to provide more stimulus to shore up the activity.

Chinese authorities face a daunting task in trying to keep the economic recovery on track and cap unemployment, as any aggressive stimulus could lead to debt risks and structural distortions.

Gross domestic product grew just 0.8% in April-June from the previous quarter, on a seasonally adjusted basis, data released by the National Bureau of Statistics showed on Monday, versus analysts’ expectations in a Reuters poll of a 0.5% increase and compared with a increase of 2.2% in the first quarter.

On an annual basis, GDP increased by 6.3% in the second quarter, accelerating from 4.5% in the first three months of the year, but the rate was well below the forecast for growth of 7.3%.

The annual pace was the fastest since the second quarter of 2021, but it was heavily skewed by economic pain caused by strict COVID-19 lockdowns in Shanghai and other major cities last year.

“The data suggests that China’s post-COVID boom is clearly over,” said Carol Kong, an economist at the Commonwealth Bank of Australia in Sydney.

“Higher rate indicators are up from May’s numbers, but still paint a picture of a bleak and shaky recovery, while youth unemployment reaches record highs.”

More timely June data, released alongside the GDP figures, showed China’s retail sales rose 3.1%, slowing sharply from a 12.7% jump in May. Analysts had expected growth of 3.2 percent.

Industrial production growth unexpectedly rose to 4.4% last month from 3.5% in May, but demand remains tepid.

Private investment in fixed assets shrank 0.2% in the first six months, a sharp contrast to 8.1% growth in investment by government entities, suggesting weak confidence in private business.

Recent data showed a rapidly faltering post-COVID recovery as exports fell the most in three years due to cooling demand at home and abroad, while a prolonged downturn in key property markets has dented confidence. The weak overall momentum has raised expectations that politicians must do more to prop up the world’s second largest economy.

Authorities are likely to roll out more stimulus measures, including fiscal spending to fund major infrastructure projects, more support for consumers and private firms, and some easing of property policy, political insiders and economists said.

But a quick turnaround is unlikely, analysts say.

All eyes are on an expected Politburo meeting later this month, when top leaders can chart the political course for the rest of the year.


Asian shares fell, while the Chinese yuan fell after the underwhelming data.

While China is on track to meet its modest 2023 growth target of around 5%, some analysts say there is a risk of missing the target.

“It was a pretty disappointing number of just 6.3%, so it’s clear the momentum is slowing,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.

“At this pace of deceleration, there is now actually a risk that the growth target may not be achieved – this 5% cannot be achieved if the economy continues to slow at this pace. So I think this increases the need for more policy support. soon.”

China’s economy grew just 3% last year due to Covid curbs, missing the official target.

Most analysts say policymakers are unlikely to deliver any aggressive stimulus amid concerns about rising debt risks.

However, a deeper downturn could lead to more job losses and raise the risk of deflation, further undermining confidence in the private sector, they said.

The youth unemployment rate climbed to 21.3% in June from 20.8% in May, a new record high, as graduates battled for limited offers during the job-hunting season.

China’s real estate sector, which accounts for about a quarter of the economy, remains on a downward trend, with new home prices for June stalling.

Property investment fell 20.6 percent in June from a year earlier after falling 21.5 percent in May, according to Reuters calculations.

A senior central bank official said on Friday that the bank will use policy tools such as the reserve requirement ratio (RRR) and medium-term lending facility to tackle economic challenges.

Last month, the central bank cut its benchmark lending rates by a modest 10 basis points.

Some economists have blamed the “scarring effects” caused by years of stringent COVID measures and regulatory curbs on the property and technology sectors – despite recent official efforts to reverse some curbs to support the economy.

Some economists have flagged the risk of a balance sheet recession, as Chinese households and private firms build up savings and reduce borrowing and spending after three years of covid restrictions.

“We expect to see monetary policy easing in the coming months and targeted financial support provided to key industries, including real estate and construction,” Goldman Sachs economists said in a note.

“But the additional support will not be a silver bullet. Increasingly, 2023 is looking like a year to forget for China.”

Reporting by Kevin Yao, Ellen Zhang and Joe Cash Editing by Shri Navaratnam

Our standards: Thomson Reuters Trust Principles.

Joe Cash reports on China’s economic affairs, covering domestic fiscal and monetary policy, key economic indicators, trade relations and China’s growing engagement with developing countries. Before joining Reuters, he worked on UK and EU trade policy across the Asia-Pacific region. Joe studied Chinese at the University of Oxford and is a Mandarin…

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