China: Disappointing GDP figures call for faster fiscal spending – Standard Chartered

GDP growth fell sharply to 0.7% in the second quarter from 1.5% in the first quarter, putting the annual growth target (5%) at risk. Supply continued to outstrip domestic demand; export prospects are uncertain with trade tensions rising. With monetary policy constrained, fiscal and housing policies are likely to bear the brunt of the effort. We expect measured rate and reserve requirement ratio (RRR) cuts when the Fed’s rate cut outlook becomes clearer, notes Standard Chartered economist Hunter Chan.

GDP growth slows in the second quarter

“GDP growth decelerated in the second quarter, confirming PMI data and other indicators, to 4.7% year-on-year, versus the consensus of 5.1% and first-quarter growth of 5.3%. Nominal GDP expanded only 4.0% year-on-year, with the deflator remaining negative due to deflationary pressures. We maintain our 2024 GDP growth forecast at 4.8% under the assumptions of monetary easing and further fiscal support.”

“China’s growth drivers remain uneven. June industrial production (IP) growth remained robust at 5.3% y/y; retail sales and services output growth decelerated to 2% y/y and 4.7% y/y, respectively; and property investment continued to contract by about 10% y/y. However, trade tensions are escalating, with the US and EU imposing new tariffs on Chinese electric vehicles (EVs), and a new round of tariffs likely following the US election in November.”

“We expect the Politburo, which is likely to meet in late July, to call for concrete measures to boost domestic demand. Increasing fiscal spending by fully utilizing proceeds from bond issuance and reducing housing stock are likely to top the policy agenda. We forecast a 10 basis point policy rate cut in the third and fourth quarters, and a 25 basis point cut in the reserve requirement ratio (RRR) in the third quarter.”