China: Economic growth slumps to near three-decade low in Q2 2019 as U.S. tariffs bite
July 15, 2019
In the second quarter of the year, the Chinese economy expanded at the weakest rate since at least 1992, when the National Bureau of Statistics (NBS) started to publish quarterly data. GDP expanded 6.2% in annual terms in Q2 2019, below both Q1’s 6.4% expansion and the 6.3% increase expected by market analysts. Nevertheless, growth is still within the government’s target of between 6.0% and 6.5% for 2019.
Although the NBS does not provide a breakdown of GDP by expenditure, additional data suggests that the trade war continued to weigh on exports and outweighed authorities’ efforts to stimulate the domestic economy. Moreover, growth in fixed-asset investment moderated in Q2, mostly reflecting weaker manufacturing investment. Conversely, growth in retail sales was robust in the quarter, suggesting that private consumption is likely supporting overall growth.
Seasonally-adjusted quarter-on-quarter GDP growth inched up from 1.4% in Q1 to 1.6% in Q2, while nominal GDP accelerated from a 7.8% year-on-year increase in Q1 to an 8.3% rise in Q2.
Although GDP growth slowed in Q2, economic indicators for the domestic economy firmed up in June. Against this backdrop, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, comment that:
“Bulls might claim that this is a result of the resilience of the Chinese economy and the effectiveness of Beijing’s countercyclical easing measures. We recommend caution, as we see no strong signals that China’s economy bottomed out in June. And, like the blip of a recovery in March, the rebound of official activity data in June may not be sustainable. […] By taking lessons from their reactions to the March data, Beijing will likely interpret and respond to the June data with some extra caution. We believe activity data could drop again in the next few months and assign a high probability to an escalation of US/China trade tensions despite the recent agreement to renew trade negotiations. Thus, we find it quite likely that Beijing will step up policy easing/stimulus towards Q4 and end-2019.”
Looking forward, trade negotiations between China and the United States will continue to shape the economic outlook for the Asian giant. On this point, Yi David Wang, head of China economics at Credit Suisse, noted:
“We maintain our annual growth outlook at 6.2% for 2019. There might be upticks to IP momentum as authorities shift their reliance back to infrastructure and real estate. That said, unless a more permanent resolution to trade negotiation is achieved in a timely manner and authorities can improve credit allocation efficiency, the uncertainty impact will be an ongoing drag to China’s manufacturing sector.”