Dismal July data shows China’s 5% growth target at risk, sparks fears of long economic slump
Aug. 14, 2024, 8:33 a.m.
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A recent string of dismal indicators have dulled expectations for China’s economic performance in July, in an ominous sign for the rest of 2024 and pointing to the need for more stimulus measures beyond plastering over pain points in the world’s second-largest economy.
Calls for additional growth-enhancing measures for the $19 trillion economy have been persistent following the failure of a widely anticipated post-pandemic recovery to materialize in 2023. Despite this, the government is aiming for economic growth of approximately 5% this year.
Advertisement The latest figures indicate a difficult start to the second half of the year. On Tuesday, central bank data revealed that new bank loans in July plummeted to a 15-year low. Simultaneously, other key indicators showed a slowdown in export growth and a decline in factory activity as manufacturers contend with weak domestic demand.
The economy had already expanded at a slower-than-expected pace in the second quarter, increasing by 4.7% year-on-year. This was attributed to cautious consumers reluctant to spend and heightened tensions in trade relations with major markets, suggesting an extended period of sluggishness is becoming increasingly probable.
“The market consensus will move to the left side of the ‘around 5%’ growth target, since the economy slowed in July and a forceful plan to support the economy seems to be missing,” said Xu Tianchen, senior economist at the Economist Intelligence Unit, which has kept its growth forecast at 4.7 per cent since March.
On Thursday, China will release a range of economic activity data. According to a poll conducted by Reuters, economists predict that retail sales grew by 2.6% year-on-year last month, compared to 2% in June. Meanwhile, industrial output is expected to have expanded at a slower pace, and investment growth is projected to have leveled off.
Authorities will also reveal the latest figures for new home prices, which declined at the fastest rate in nine years in June, despite a range of support programs aimed at attracting buyers and halting a prolonged property downturn.
Credit data released this week showed that household loans, primarily mortgages, shrank by 210 billion yuan ($29.37 billion) in July, compared to an increase of 570.9 billion in June.
Advertisement One of the main reasons people are not spending in China is that 70% of household wealth is tied up in real estate, a sector that has long been a key growth driver.
Exports
One of the few bright spots this year - exports - has so far failed to ignite a broader economic revival, largely due to manufacturers being forced to cut prices to secure overseas buyers amidst weak domestic demand.
And there are signs that global demand is slowing. The official factory managers’ survey for July showed producers received fewer export orders for a third month.
“It all hinges on exports,” said Alicia Garcia Herrero, chief economist for the Asia-Pacific at Natixis.
Advertisement “Exports are stagnant, (and) we have already seen Thailand announcing import tariffs, and, of course Turkey, Europe, and the US.”
“If we see exports growing negatively, then I think we need to lower our projections for 2024, maybe to 4.2 per cent, something like that.”
Following an unexpected decrease in a short-term rate in July, several economists are predicting additional interest rate reductions in China in the latter part of this year, especially if the US Federal Reserve initiates cuts in borrowing costs beginning in September. However, given the weakness of domestic demand and the uncertain outlook, households and businesses are not rushing to take on new debt.
Advertisement “There is definitely a chance officials will hurry up to announce a more clear plan to stimulate domestic consumption since they seem particularly concerned about poor domestic demand recently,” the EIU’s Xu said.
($1 = 7.1497 Chinese yuan renminbi)
