Wall Street Cuts China Growth Forecasts as Economy Disappoints

GDP growth target under threat

Citigroup Inc. economists lowered their forecast for GDP growth this year to 5% from 5.5%, saying Beijing’s official target — set in March at around 5% — was now at risk.

The new projection takes into account “more realistic” policy support over the coming months, the economists including Yu Xiangrong wrote. They said while a meeting of the Communist Party’s Politburo later this month will provide clues about policy thinking, there are risks that policy could “fall behind the curve or short of expectations.”

JPMorgan trimmed its forecast to 5% from 5.5%, while Morgan Stanley reduced its estimate to 5% from 5.7%. United Overseas Bank Ltd., Capital Economics Ltd. and Societe Generale SA also lowered their predictions.

No major policy stimulus package on the cards

Investors should trim their expectations for a “fast, cure-all package” of stimulus measures, said Nomura Holdings Inc. Chief China Economist Lu Ting.

“We don’t think today’s data will push Beijing to step up stimulus measures,” he said, though Nomura held its GDP forecast for 2023 at 5.1% expansion.

While Lu expects Beijing to introduce some supportive measures, including two policy rate cuts of 10 basis points and additional fiscal transfers to local governments, he said “these measures may not turn things around.”

Lu cited challenges including weak confidence, the collapse of land sales as a revenue source creating a “huge fiscal cliff,” along with “clogged transmission channels, a shrinking toolbox” and “slow decision-making on economic matters.”

Frederic Neumann, chief Asia economist at HSBC Holdings Plc., said that overly stimulating demand right now “may prove counter-productive by stoking the build-up in debt and accentuating some of the economy’s imbalances, such as its reliance on a vast housing construction sector.”

Budget constraints of local governments may be another factor limiting stimulus, according to Zerlina Zeng, senior credit analyst at CreditSights.

Property market recovery is key to growth prospects

Beijing will need to revive the housing market in order to see better growth in the economy, said Jacqueline Rong, chief China economist at BNP Paribas SA.

“The only growth driver left is investment, whose biggest problem is property,” Rong said. “The most urgent support needed for property is to stabilize the supply side — too many developers have been in trouble and there can’t be more large-scale defaults, otherwise housing development will come to a halt.”

Consumer confidence is waning

Monday’s data showed a marked slowdown in retail sales growth — June’s figure grew 3.1% from the prior year. That was worrying, according to Louis Kuijs, chief economist for Asia Pacific at S&P Global Ratings.

“What we all expected was a consumption and service-led recovery. If that is sputtering, then there’s no engine left for the recovery,” Kuijs said, nodding to concerns about trouble in exports — which had been a driver of growth for the last few years — as well as real estate.

“If exports and real estate are both weak, that means we cannot expect too much on the industrial side,” Kuijs said.

Youth unemployment to climb further

China’s youth unemployment rate, which was above 20% for a third consecutive month, could climb even higher in July, government officials warned on Monday. It’s expected to cool after the summer — a traditionally high time for unemployment among young people, when they have graduated and are looking for jobs.

“The youth unemployment rate is more of a structural issue,” said Ding Shuang, chief economist for Greater China & North Asia at Standard Chartered Plc. He added that the government will likely take more targeted measures to address that issue, rather than “blanket stimulus” including interest rate cuts.

Deflation risk is now real

Concerns about deflation mounted last week after China reported no growth in consumer prices in June and a 5.4% contraction in producer prices. Monday’s data showed the GDP deflator, a measure of economy-wide prices, was negative in the second quarter for the first time since 2020. The deflator is calculated as the difference between the nominal GDP growth rate and the inflation-adjusted rate.

The “risk of deflation is serious,” said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management.

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