China’s 2Q24 GDP growth fell to 4.7% YoY, coming in noticeably softer than forecasts for 5.1% YoY. This brought the year-to-date GDP growth down to 5.0% YoY for the first half of the year, which keeps China still on pace to achieve its 5% GDP growth target for now.
Through 1H24, the secondary industry has been the primary driver of growth, up 5.8% YoY, as manufacturing has largely outperformed expectations in the year to date amid the strength of the EV sector and a pivot toward hi-tech manufacturing and technological self-sufficiency. The tertiary industry growth slowed to 4.6% YoY from 5.8% YoY in 2023, as weak consumption momentum impacted services demand.
The two big drags on GDP growth continued to be the property sector and consumption.
The drag from the property market should come as no surprise. Property investment slumped -10.1% YoY through 1H24, and today’s price data showed the price decline continuing in June. A silver lining was that more cities saw price increases, and we saw some stabilisation in some key tier 1 and 2 cities. Stabilising home prices should be the top priority in order to support confidence, and if policy support continues to roll out we could see some positive signs in the coming months. Nonetheless, the actual drag on GDP growth will likely persist for an extended period of time, as even if prices bottom out, there is still a high level of inventories that need to be digested before new investment takes place.
We’ve discussed the slowdown of consumption many times in the focus on shifting growth drivers for China in 2024. After accounting for an 82% share of growth in 2023, the 2% YoY growth in retail sales was the weakest level since exiting pandemic restrictions, and showed weak consumer confidence remaining a major headwind to the economic recovery. A negative wealth effect from falling property and stock prices, as well as low wage growth amid various industries’ cost cutting is dragging consumption and causing a pivot from big-ticket purchases toward a basic “eat drink and play” theme consumption.
Another point to note was that amid the very gradual incline of inflation in the second quarter, we consequently saw a significantly less supportive GDP deflator in 2Q24 of -0.7% compared to -1.1% in 1Q24. This added 0.4 percentage points less to real GDP growth and may have contributed as well to the softer-than-expected read.
Despite GDP growth remaining on pace to achieve the 5% growth target for now, there will be less supportive base effects in 2H24, making the road to 5% challenging. We will likely need to see further policy support in the coming months if this goal is to be reached.
