China’s economic growth to more than halve in second quarter, more policy support seen
China’s economic growth likely slowed in the second quarter, as higher raw material costs hurt factories and new COVID-19 outbreaks weighed on consumer spending, a Reuters poll showed, suggesting policymakers may do more to support growth.
Gross domestic product (GDP) likely increased 8.1% year-on-year in the April-June quarter, according to the median forecasts of 51 economists polled by Reuters.
That would mark a significant slowdown from a record 18.3% expansion in the January-March period, when the year-on-year growth rate was heavily skewed by the COVID-induced slump in the first quarter of 2020.
The world’s second-largest economy has been recovering since the second quarter of last year, buoyed by solid overseas demand for its exports, but growth is losing steam as manufacturing activity slows on higher raw material costs and supply shortages, while small COVID-19 outbreaks have also kept a lid on consumer demand.
“We maintain our view that downward pressure on growth will likely increase in H2,” said Nomura analysts in a note, expecting pent-up demand to subside and exports growth to weaken as developed economies reopen. They also cautioned that surging raw materials prices will suppress consumption.
The People’s Bank of China’s decision on Friday to cut the amount of cash banks must hold as reserves, even as the central bank has sought to normalise policy to contain financial risks, has fuelled concerns about an economic slowdown.
But data on Tuesday showing China’s exports grew at a much faster pace than expected in June provided some respite.
Barclays analysts estimated that the two-year average growth rate for the first half of this year would be 5.0-5.5%, well below pre-COVID-19 levels of 6.0-6.5% in 2019.
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China’s statistical bureau has said the two-year average growth rate in the first quarter was 5.0%.
On a quarterly basis, growth is forecast to pick up to 1.2% in April-June from 0.6% in the first quarter, the poll showed.
Economists in the poll expected the economy to expand 8.6% this year, the highest annual growth in a decade, after a 2.3% expansion in pandemic-hit 2020. The latest poll result was unchanged from April’s forecast.
China has set an annual economic growth target at above 6% this year, below analysts’ expectations, giving policymakers more room to cope with uncertainties. Growth is then expected to moderate to 5.5% in 2022, according to the poll.
MORE POLICY SUPPORT EXPECTED
With the economic recovery showing some signs of losing momentum and still uneven, analysts expect policymakers may roll out more steps to buoy activity later this year.
China’s central bank said on Friday it would cut the bank reserve requirement ratio (RRR) for the first time since April 2020 to underpin its post-COVID economic recovery that is losing momentum.
The cut in the RRR – the amount of cash that banks must hold as reserves – will take effect on Thursday, when the statistical bureau is due to release second-quarter GDP data, along with June factory output, retail sales and fixed-asset investment.
The PBOC is likely to deliver another 50-basis points cut in the RRR in the fourth quarter, as the pressure on the economy persists while consumer inflation eases, according to the poll.
Analysts expect China will keep its one-year loan prime rate(LPR) steady at 3.85% until the end of 2021. The LPR has remained unchanged since May 2020.
“Further cuts in RRR are still possible, but fiscal policy is more important as we need to speed up spending and ensure the completion of the annual special bond quota,” said Wang Jun, Beijing-based chief economist at Zhongyuan Bank.
Data from the finance ministry showed local governments issued a net 584 billion yuan ($90.34 billion) in special bonds in January-May, accounting for 16% of the annual quota of 3.65 trillion yuan. Special bonds are mainly used for funding infrastructure projects.
The poll also predicted no change to the benchmark deposit rate until the end of 2021. The PBOC has kept it steady at 1.5%since October 2015.
Consumer inflation will likely slow to 1.5% in 2021 from 2.5% in 2020, but it could pick up to 2.3% in 2022, according to the poll.
