China’s GDP Growth Laboured In The Second Quarter

SECOND-QUARTER GDP growth came in at 7.9% year-on-year, the National Bureau of Statistics of China (NBS) reported today.

That is about what was expected, if a tad below the round 8% of consensus forecasts, but also confirming the hints authorities have been giving about the recovery of the domestic economy from the Covid-19 pandemic losing momentum.

More local outbreaks of Covid-19 across China and higher raw material costs were contributing factors. Retail sales and industrial production are growing but not consistently; high-tech manufacturing, however, is on a tear. The housing market cooled in response to official measures to prevent overheating.

Exports are the engine of growth at present, but face headwinds in the second half of the year.

The lagging recovery of domestic demand may reflect consumers’ uncertainty over their job security. The NBS said the employment situation is stable. It might be expected that it would be improving in line with the recovery.

More policy support may follow the People’s Bank of China’s modest policy easing last week to boost domestic consumption. That could take the form of further reductions in banks’ reserve requirement ratios or a rate cut.

The balancing act for the central bank between normalising policy post-pandemic and not choking off a broad-based recovery is difficult. The underlying financial risks present before the pandemic have not gone away. If anything, pandemic recovery stimulus has made them worse.

There is not much to be made of a comparison with the first quarter’s growth of 18.3% as the economy hit its Covid-19 recession in the comparative quarter last year.

A more illuminating comparison is the annualised two-year growth for the second quarter. At 5.5%, it suggests the economy is getting back to its long-term glide path to slower but sustainable growth. Authorities full year GDP growth target of ‘above 6%’ may be at risk without domestic demand picking up.