Economy Watch | China

A Bad Start into Q3 Puts Yearly Growth Target in Jeopardy (Economy Watch: China)

August 31, 2023

Trusted Insights for What's Ahead™

• Status of China’s Economy – Going into Q3, the Chinese economy continues losing momentum, reflecting a series of demand-side structural imbalances which will take time to address. Considering the mounting growth headwinds that China is facing, we believe it will be difficult for its GDP to expand by the official target of “around 5 percent” in 2023 and have therefore decided to revise down our growth forecast for the year from 5.1 percent previously to 4.8 percent.
• Investment Trends – Growth in fixed asset investment (FAI) continues to slide. Although FAI in infrastructure and manufacturing is growing well above pre-Covid levels, it has started decelerating, and the magnitude of the growth has not been enough to offset the large decline in real estate investment. Moreover, weakness in external and domestic demand, and the impact this is having on profit margins, is likely to discourage manufacturing firms from investing further.
• Consumption Trends – The consumption recovery is losing steam, and this is being reflected in decelerating y-o-y and contracting m-o-m retail sales growth. The main issue is persistent consumer confidence weakness, which is not likely to change anytime soon because of the ongoing property downturn, a challenging job market and demand-side structural imbalances, such as the lack of a robust social security net.
• Trade Trends – Growth in Chinese exports tumbled further into negative territory in July. With the manufacturing PMI’s new export orders subindex having declined further in July and well below 50, we see little short-term upside for exports. Looking ahead, export growth will likely remain negative driven by the slowdown of the global economy and because of the impact of geopolitical developments.
• Implications for Business – July data undoubtedly added further pressure to China’s growth outlook. Official government commentary has started acknowledging the extent of economic strain and various government branches are laying out supportive policies. But, in our view, the steps taken so far (e.g., interest rate cuts and lower downpayment requirements) are not enough to turn the tide quickly, as they are addressed at supporting the supply-side of the economy when, in fact, the current growth weakness is underpinned by demand-side structural imbalances. It also doesn’t look like central planners are willing to commit to more immediate, major support measures. Therefore, we are likely looking at a period of continued economic weakness.