China: Solid Q2 GDP masks weaknesses in June – Standard Chartered

GDP growth remained solid at 5.2% y/y in Q2, while monthly data indicates signs of softening. Investment growth slowed sharply in June partly due to a deeper decline in housing investment. Deflationary pressure escalated, partly reflecting overcapacity in some sectors. More efforts to stabilize the housing sector and promote services consumption likely in H2, Standard Chartered's economists report.

Investment losing steam

"China’s economic growth remained resilient in Q2 thanks to front-loaded production and trade activity, as well as fiscal stimulus. Seasonally adjusted GDP expanded 1.1% q/q in Q2, merely 0.1ppt slower than Q1. Real GDP growth moderated 0.2ppt from Q1 to 5.2% y/y, staying above 5% for the third straight quarter. Consumption remained the key driver and net exports continued to support economic growth. The negative gap between nominal GDP growth (3.9% y/y) and real growth widened, suggesting persistent and intensified deflationary pressure. The GDP deflator fell 1.2% y/y in Q2, staying negative for nine straight quarters, on our estimate."

"However, June data indicates that domestic momentum slowed from May, partly reflecting the tariff impact and fading front-loading boost. While industrial production (IP) growth accelerated to a three-month high of 6.8% y/y, m/m growth slowed. Retail sales declined m/m, partly due to normalization from the May holiday boost, in our view. In addition, fixed asset investment (FAI) fell m/m on a further contraction in real estate investment, as well as slower growth in manufacturing and infrastructure investment. We expect growth momentum to ease entering H2 as forces contributing to YTD outperformance may soften."

"We maintain our 2025 growth forecast at 4.8% and see no urgency for policy makers to introduce additional stimulus given the H1 outperformance. We expect more policy efforts to stabilize the housing sector through faster acquisition of unsold homes and unused land and promotion of urban-village renovation."