China's Economic Outlook Faces Increasing Downside Risks (Economy Watch: China View, July 2023)

Trusted Insights for What’s Ahead^®

• Status of China’s Economic Recovery – The Chinese economy continues losing momentum, with Q2 growth below market expectations. The low base effect of 2022 was one of the key reasons why the official growth target of “around 5 percent” for 2023 was thought to be easily reachable. However, with the economy on the brink of a deflation, as suggested by June data, we believe that achieving the official growth target will no longer be an easy feat. Our 2023 GDP growth forecast of 5.1 percent remains unchanged, but risks are tilted to the downside. 
• Investment Trends – Growth in Fixed asset investment (FAI) continues to slide. Although FAI growth in infrastructure remains robust and stabilized in June for manufacturing, this was not enough to even out the decline in real estate investment. Moreover, because growth in industrial profit and exports is negative, it is unlikely that manufacturing investment growth can remain stable at its current level in the near future. Looking forward, it is likely that manufacturing investment will further decelerate.
• Consumption Trends – The consumption recovery is also losing steam; this can be seen in both moderating y-o-y and m-o-m retail sales growth. While both household income and job creation increased y-o-y in June, neither have returned to pre-COVID levels. Hiring intentions were generally weak and youth unemployment continued to worsen, both worrying signs in terms of further household income increases.
• Trade Trends – Growth in Chinese exports tumbled into negative territory in June. With the manufacturing PMI’s new export orders subindex having declined further in June, we see little upside for exports in coming months. Looking ahead, export growth will likely remain negative as weak external demand and geopolitical risks are unlikely to change in the short term.
• Implications for Business – Q2 data added further pressure to China’s growth outlook. Without major policy adjustments, the current trajectory points to a further slowdown in H2. Official government commentary has started acknowledging the extent of economic strain. But, in our view, the measures announced so far to promote the private sector and boost domestic demand – e.g., at the most recent Politburo meeting – are not enough to turn the tide quickly. And it doesn’t look either like central planners are willing to commit to more immediate, major support measures. Therefore, we are likely looking at a period of continued economic weakness, which will lengthen the recovery of domestic demand and industrial activity.