Upcoming Politburo meeting will be closely watched as China’s economy experienced slower growth than expected in the second quarter, raising concerns about a potential slowdown in consumer spending and ongoing struggles in the property market. Data released by the National Bureau of Statistics revealed that gross domestic product (GDP) expanded by 6.3% YoY in the second quarter compared to the previous year. This figure fell short of economists’ median forecast of 7.1%, as surveyed by Bloomberg. In addition, youth unemployment rate reached a new record high, adding further pressure on the government to respond with new supportive measures at next Politburo meeting.
China GDP Missed Expectations, Other Data Confirm Weakening Momentum
In the second quarter of 2023, the year-on-year GDP growth rate increased to 6.3% from 4.5% in the first quarter. However, this fell significantly short of the expected growth rate of 7.1% as predicted by experts. The main reason for the increase was the comparison to a lower base in the previous year. Looking at the quarter-on-quarter performance, the economy only expanded by 0.8% in the second quarter, a significant decrease from the 2.2% growth experienced in the first quarter of 2023. This growth rate was only half of the average pace (1.6%) observed during the 2015-2019 period, indicating a weaker post-Covid recovery. As a results, economists are likely to revise downward their estimates for 2023 GDP.
In the meantime, retail sales growth showed a significant slowdown, with June figures indicating a slowdown to just 3.1% year-on-year, compared to 12.7% growth in May. This was below the consensus forecast of 3.3%. Meanwhile, industrial production experienced an unexpected pickup, with June’s year-on-year growth reaching 4.4% compared to 3.5% in May. However, the overall demand remains lukewarm, posing obstacles to sustaining the recovery.
Youth Unemployment and Property Sector Remain Key Concerns
The economic data also highlighted various weak areas, such as surging youth unemployment and deflation. The unemployment rate for 16- to 24-year-olds reached a new high of 21.3% in June, and there are concerns that it could rise even further in the coming months.
*Source: Bloomberg, NBS
In the meantime, the decline in China’s property investment has worsened during the first half of this year, indicating a further downturn in the sector, while policymakers promise increased support. According to data released on Monday by the National Bureau of Statistics, investment in property development dropped by 7.9% in the first six months of 2023. This decline is greater than the 7.2% decrease observed from January to May. Economists surveyed by Bloomberg had predicted a slightly smaller decline of 7.5%.
The Upcoming Politburo Meeting Will Be Closely Watched
The weak economic data has strengthened the case for additional policy support. Further monetary easing is expected, with analysts anticipating a rate cut and a lower reserve requirement ratio later in the quarter. A senior central bank official stated on Friday that the People’s Bank of China (PBOC) intends to utilize measures like the reserve requirement ratio (RRR) and MLF (medium-term lending facility) in order to support the resilience of the world’s second-largest economy against various challenges.
Policymakers are also likely to boost fiscal support, potentially allowing local governments to access unused special bond issuance quotas for infrastructure investment. Additionally, providing assistance to vulnerable households and small, private companies could provide a crucial lift to sentiment. Reviving the ailing property sector is also expected to be a priority for the central and local governments.
China’s economic recovery is at a critical juncture, as demand weakens both domestically and internationally. Policymakers face the challenge of balancing the need for additional stimulus to support economic activity while managing the risks associated with mounting debt and structural distortions. A cautious approach is expected, but a deeper slowdown could warrant more significant measures to prevent job losses and deflationary risks. The upcoming Politburo meeting at the end of the month will be closely watched as it could determine the policy direction for the remainder of the year.