China: Growth Momentum Slows
Bottom Line: China underlying growth momentum slowed, as best shown by quarterly growth slowing to 0.8% versus 2.2% in Q1 and monthly retail sales in June at +0.23%. Industrial production was somewhat better in June, but needs consumption growth to pick up again to sustain a better pace in H2. We maintain our view of below trend growth in H2 and 4.5% growth in 2024. Further policy easing will likely come, but did not arrive from the PBOC today.
Figure 1: China GDP Yr/Yr (%)
Source: Continuum Economics/BIS
China growth momentum slowed in Q2 with a 0.8% rise on the quarter compared to the 2.2% quarterly gain in Q1.Though the Yr/Yr picked up to 6.3% from 4.5%, this is due to base effects with the Shanghai lockdown in Q2 2022 and the quarterly change is a better indicator of underlying economic growth.
The June monthly set of data reflected this slowdown. Retail sales YTD slowed to 8.2% in June versus 9.3% in May, while the mth/mth change was 0.23% -- Yr/Yr slow dramatically from 12.7% in May to 3.1%, due to the effects of the shanghai lockdown in May and easing in June 2022. The breakdown of the data is volatile on the Yr/Yr basis, but is consistent with a slowing of consumer momentum. Autos are now -1.1% Yr/Yr and consumer goods +1.7%. Consumer services at 6.8% Yr/Yr also shows some slowing. Confidence is a key issue, with China’s consumers concerned about the residential property sector and this is their main source of wealth. Additionally, the 2020-22 COVID period has hurt employment and income growth and this needs to broaden and pick up speed to help sustain consumption growth.
The news is mixed on employment prospects however. Industrial production did perform better in June at 4.1% Yr/Yr versus 3.5% in May and 3.8% YTD v 3.5% YTD in May. However, fixed asset investment slowed to 7.2% YTD versus 7.5% in May, due to slower public investment. Meanwhile, property investment continues to remain a drag on the economy and was -7.9% in June v -7.2% in May. Some benefit should come through in H2 for employment, but it will be partially counted by the consumption trend that is now below the 2015-19 experience.
This all leaves an economy in need of further policy easing to ensure momentum. Though the 5% growth target should be achieved for 2023, this is largely due to base effects and our 2024 forecast is now 4.5% (here). However, as expected the PBOC did not cut the medium-term facility rate today and policy easing is likely to be gradual and measured (here). The next policy focus is the politburo meeting later in the month and whether it see any announcement on additional fiscal policy measures.