China: Economic growth slows in the second quarter
July 15, 2021
GDP growth lost momentum in the second quarter, falling to 7.9% year-on-year from 18.3% in the first quarter. The slowdown was influenced by the base effect growing less favorable, although underlying momentum—as indicated by comparing the quarters of 2021 to the same period in 2019—improved, with growth in Q2 relative to Q2 2019 speeding up to 5.5% from 5.0% in Q1. That said, this shows the economy is still growing more sluggishly than its pre-Covid level.
Adjusting for base effects, momentum in the secondary sector was broadly stable, likely weighed on by chip shortages affecting vehicle production, while the tertiary and primary sectors gained steam. In particular, consumer spending dynamics appeared to improve in Q2, as demonstrated by faster growth in retail sales compared to the same period in 2019. Activity appeared to fluctuate during the quarter: After a weak set of data in May for indicators such as industrial output, fixed investment and retail sales, the figures for June were more positive than markets were expecting, suggesting a stronger end to the quarter.
On a seasonally-adjusted quarter-on-quarter basis, economic growth gathered pace, accelerating to 1.3% in Q2, compared to the previous period's 0.4% increase.
Looking ahead, annual growth rates should continue to moderate in the second half of the year on a less favorable base effect, and as consumption in developed markets pivots from goods to services, tempering China’s export sector. Moreover, downside risks to the economy are gathering, as higher raw material prices hurt firms’ profit margins and government restrictions on the property sector and efforts to reduce carbon emissions dampen activity. On the flipside, the PBOC’s recent reserve requirement ratio cut should prop up the economy somewhat.
On the implications of the GDP figures for policymaking ahead, analysts at Nomura stated:
“We expect Beijing to maintain its tight hold on the property sector and continue to implement measures to cut carbon emissions at least until year-end, despite the financial pinch expected in low-tier cities in North China. However, at the same time, we expect it to roll out further easing measures for the remainder of the economy (especially the high-tech manufacturing sectors), speed up government bond issuance and fiscal spending, and even ease constraints to some extent on the financing of local government financing vehicles.”
Author: Oliver Reynolds, Economist