China’s GDP Slows in Q2, Raising Urgency for More Policy Stimulus

China’s economic growth in the second quarter shows signs of faltering as demand weakens both domestically and internationally, placing pressure on policymakers to take further action to stimulate activity. However, policymakers must balance the need for economic recovery with concerns over debt risks and structural distortions. According to data released by the National Bureau of Statistics, Gross Domestic Product (GDP) grew only 0.8% on a seasonally adjusted basis in April-June, falling short of analysts’ expectations but surpassing the 0.5% increase projected in a Reuters poll. The growth rate also slowed significantly from the 2.2% expansion seen in the first quarter. On a year-to-year basis, the GDP expanded by 6.3% in the second quarter, accelerating from the 4.5% growth experienced in the first three months of the year. However, this figure fell below the forecast for growth of 7.3%.

Economists have interpreted this data as a clear indication that China’s post-COVID boom has come to an end. Carol Kong, an economist at Commonwealth Bank of Australia, commented on the bleak nature of the recovery and the high youth unemployment rate. This sentiment is supported by June’s retail sales data, which showed a significant slowdown in growth compared to the previous month. Retail sales growth was only 3.1%, following a 12.7% jump in May and missing analysts’ expectations of 3.2%. Industrial output growth, on the other hand, unexpectedly quickened to 4.4% in June from 3.5% in May, indicating lukewarm demand. Private fixed-asset investment also contracted by 0.2% in the first half of the year, highlighting weak private business confidence in contrast to the 8.1% growth in investment by state entities. The overall weak momentum in the Chinese economy has raised expectations that policymakers will need to implement further stimulus measures.

Chinese authorities are likely to roll out more stimulus steps, including fiscal spending for infrastructure projects, increased support for consumers and private firms, and some easing of property policies. However, analysts believe that a quick turnaround is unlikely. The focus is now on an expected Politburo meeting later this month, where top leaders will chart the policy course for the rest of the year. The disappointing GDP figures and slowing momentum have increased the urgency for more policy support. Although China is on track to achieve its modest 2023 growth target of around 5%, there are risks of missing this goal if the economy continues to decelerate.

While policymakers are hesitant to implement aggressive stimulus measures due to concerns about growing debt risks, a deeper slowdown could lead to more job losses and deflationary risks, further undermining private-sector confidence. The property sector, which is a significant contributor to the Chinese economy, remains in a downtrend, with new home prices stagnating in June and property investment falling for the second consecutive month. The central bank has indicated that it will utilize policy tools such as the reserve requirement ratio and medium-term lending facility to navigate the economic challenges. Economists suggest that monetary policy easing and targeted fiscal supports will be employed in the coming months, particularly in key industries like real estate and construction. However, additional support will not provide a quick fix for the economic challenges China faces in the upcoming year.

In conclusion, China’s economic growth in the second quarter has weakened, indicating the end of the post-COVID boom. Policymakers face the difficult task of stimulating the economy while managing debt risks and structural distortions. Retail sales growth has slowed, while industrial output growth remains lukewarm. Private fixed-asset investment has contracted, reflecting weak private business confidence. Policymakers are expected to introduce further stimulus measures, but a quick turnaround is unlikely. The focus now shifts to an upcoming Politburo meeting where the policy course for the rest of the year will be determined. Missed growth targets and a continued slowdown could lead to more job losses and deflationary risks. The property sector, a key component of the Chinese economy, remains in a downtrend. The central bank will use policy tools to navigate these challenges, and economists anticipate monetary policy easing and targeted fiscal supports in the coming months. Additional support, however, will not provide an immediate solution to China’s economic challenges.