The only way is up for China’s economy
Chinese real GDP growth slowed to 6.2% year-on-year (y/y) in the second quarter, following a strong-than-expected performance of 6.4% y/y in the previous quarter.
Given the weak macroeconomic data in April and May, some weakness is unsurprising, and there looks to be some payback from the freakishly strong data prints in March. However, with the distortions arising from policy changes now played out, the better data for June is an encouraging sign for activity in the third quarter.
Slowing growth, despite policy support
The average growth rates for high frequency data support the story told by GDP, with fixed asset investment, industrial production, trade and retail sales all slower over the quarter. The weakness in investment will be of particular concern to the central government which has enacted an array of policies this year aimed at revving the engine in this sector.
Yet despite tax cuts for manufacturers and an easing of conditions for local governments, both manufacturing and infrastructure investment were sharply weaker in the second quarter. Only property investment managed to hold up.
More stimulus likely
More stimulus seems likely, and we expect announcements either this week or next. However, the magnitude will be modest, for a couple of reasons:
Firstly, even though this is the slowest rate of growth in over two decades, it does not yet imperil official targets, and the government will want to keep some powder dry in the event of greater external shocks.
Secondly, while the quarter’s data was disappointing, the weakness was very much concentrated in the first two months. June has seen strong rebounds in industrial production, retail sales, and a modest pick up in investment. We think a lot of the weakness in the quarter was payback for frontloaded activity in March, driven by the perverse incentives of tax and other policy changes at that time.
Third quarter recovery still on the cards
Consequently we stick to our forecast for a recovery in the third quarter, and expect to see easing from the central bank and additional fiscal support provided by the central government by the end of July. Action now should help cement the turning point in the data and support growth through to the end of the year.
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