China’s GDP growth slowed to 0.8% in the second quarter of 2023, compared to a growth of 2.2% in the previous quarter, indicating a faltering post-COVID recovery. On a year-on-year basis, GDP expanded 6.3% in Q2, but fell short of the forecasted 7.3% growth. The low base effects from stringent COVID-19 lockdowns last year contributed to the year-on-year growth. Weak demand both domestically and abroad has put pressure on Chinese policymakers to introduce more stimulus measures to bolster economic activity.
Chinese authorities face a challenging task in maintaining the economic recovery while addressing the issue of unemployment. However, policymakers are wary of implementing aggressive stimulus measures due to concerns over debt risks and structural distortions in the economy. The recent data, including low retail sales growth and shrinking private fixed-asset investment, indicates a bleak and faltering recovery.
Market expectations suggest that policymakers will introduce more stimulus steps, including fiscal spending for infrastructure projects, support for consumers and private firms, and some property policy easing. However, analysts predict that a quick turnaround is unlikely. All eyes are on the upcoming Politburo meeting later this month, where the policy course for the rest of the year is expected to be discussed.
The disappointing GDP growth raises concerns about China achieving its modest 2023 growth target of around 5%. Analysts suggest that there is a risk of missing the target if the economy continues to decelerate at the current pace. The uncertainty surrounding economic growth underscores the urgency to provide additional policy support.
While policymakers are cautious about aggressive stimulus measures due to mounting debt risks, a further slowdown in the economy could result in more job losses and deflationary risks. The youth jobless rate, for example, reached a record high of 21.3% in June. Furthermore, the property sector, which accounts for a quarter of the economy, remains in a downtrend, with property investment slumping in recent months.
The central bank has already taken measures such as cutting benchmark lending rates and utilizing policy tools like the reserve requirement ratio. Some economists argue that strict COVID measures and regulatory curbs on the property and technology sectors have resulted in the “scarring effects” on the economy. They believe that additional monetary policy easing and targeted fiscal supports are necessary to counter these effects. However, it is important to note that these measures may not completely solve the challenges faced by the Chinese economy in 2023.
Overall, the frail GDP growth in the second quarter highlights the need for policymakers to take decisive action to support the Chinese economy. Balancing the need for stimulus with concerns over debt risks will be a key challenge in the coming months.