China’s economy grew at a slower pace than expected in the second quarter of 2024, with a GDP increase of 4.7%, missing the forecasted 5.1% and marking the slowest growth since Q1 2023. This slowdown is primarily attributed to a prolonged property downturn and job insecurity, which have dampened consumer confidence and spending.
Consumer Sector and Retail Sales
Of particular concern is the consumer sector, where retail sales growth has hit an 18-month low. Businesses are forced to slash prices due to deflationary pressures, affecting a wide range of goods from cars to food and clothing. Lynn Song, chief economist for Greater China at ING, highlights the negative wealth effect from declining property and stock prices, coupled with low wage growth, as significant drags on consumption.
Property Market Crisis
The property market crisis deepened in June, with new home prices falling at the fastest pace in nine years. This decline has severely impacted consumer confidence and local governments’ ability to generate revenue through land sales. The property sector’s struggles are a significant challenge for Beijing as it aims to stabilize the economy while managing high levels of debt.
Government Response and Future Expectations
To address the economic slowdown, China has increased infrastructure investment and directed funds into high-tech manufacturing. Despite these efforts, the yuan and stock markets fell following the disappointing economic data. Analysts expect that the Chinese government will need to implement additional stimulus measures to achieve its ambitious growth target of around 5% for 2024.
Harry Murphy Cruise, an economist at Moody’s Analytics, notes that the success of the remainder of 2024 will depend on the government’s ability to arrest the property market’s decline and boost domestic spending. On a quarterly basis, growth slowed to 0.7% from 1.5% in the previous three months, reflecting the ongoing challenges.
Industrial Output and Trade Tensions
While industrial output has outpaced domestic consumption, deflationary risks remain due to the property downturn and increasing local government debt. Rising trade tensions pose an additional threat, despite solid export performance. Factory output growth exceeded expectations in June, but the overall trend showed a slowdown from May.
Retail Sales and Household Consumption
Retail sales rose only 2.0% year-on-year, the slowest growth since December 2022, indicating weak household consumption. High youth unemployment and salary cuts are contributing to consumer caution, further dampening retail sales.
Property Investment and Bank Lending
Property investment fell 10.1% in the first half of 2024, with home sales by floor area declining 19.0%. Bank lending for June showed faltering demand, with some key gauges hitting record lows. To support growth, China’s central bank governor has pledged to maintain a supportive monetary policy stance.
Anticipated Stimulus Measures
Analysts expect a 10-basis point cut in China’s one-year loan prime rate and a 25-basis point cut in banks’ reserve requirement ratio in the third quarter. Citi analysts predict another round of property-supporting measures after a Politburo meeting in late July. Measures may include allowing local state-owned enterprises to purchase unsold homes and setting up a 300 billion yuan relending loan facility for affordable housing.
Conclusion
China’s economic challenges are significant, with a protracted property downturn and weak consumer confidence posing major obstacles to growth. The government’s response in the coming months, including potential stimulus measures and policy adjustments, will be crucial in determining whether China can achieve its growth target for 2024. While reforms are necessary, they are expected to be modest to avoid the perception of failure, allowing China to potentially meet its growth objectives.
