China: GDP miss calls for faster fiscal spending – Standard Chartered

GDP growth fell sharply to 0.7% q/q in Q2 from 1.5% in Q1, putting the annual growth target (5%) at risk. Supply continued to outperform domestic demand; export outlook is cloudy with rising trade tensions. With monetary policy constrained, fiscal and housing policies will likely need to do the heavy lifting. We expect measured rate and RRR cuts when Fed rate-cut prospects become clearer, Standard Chartered Economist Hunter Chan notes.

GDP growth decelerates in Q2

“GDP growth decelerated in Q2, confirming PMI and other data prints, to 4.7% y/y, versus consensus’ 5.1% and Q1 growth of 5.3%. Nominal GDP only expanded 4.0% y/y, with the deflator staying negative due to deflationary pressures. We maintain our 2024 GDP growth forecast of 4.8% on the assumptions of monetary easing and stronger fiscal support.”

“China’s growth drivers remain uneven. June industrial production (IP) growth remained robust at 5.3% y/y; retail sales and services production growth slowed to 2% y/y and 4.7% y/y, respectively; and property investment continued to contract by c.10% y/y. However, trade tensions are rising, with the US and EU imposing new tariffs on China EVs, and a likely new round of tariffs after the US elections in November.”

“We expect the Politburo, which is likely to convene in late July, to call for concrete measures to boost domestic demand. Ramping up fiscal spending by fully utilising bond issuance proceeds and reducing housing inventory are likely to top the policy agenda. We forecast a 10bps policy rate cut in both Q3 and Q4, and a 25bps cut in the reserve requirement ratio (RRR) in Q3.”