China’s Q2 activity data again highlighted disparate conditions across the economy. New industry continues to surge ahead, but the consumer is being left behind.
China GDP disappointed in Q2, gaining 0.7% after a 1.6% increase in Q1. Year-to-date at June, growth of 5.0% is down from 5.3% in March, but still consistent with authorities ambitions for 2024. This is despite support from the Government remaining passive.
Aggregate growth remains dependent on trade and business investment, particularly in high-tech sectors of the economy. While the trade surplus narrowed significantly through Q1, creating a headwind for growth in Q2, in May and June the surplus widened again, setting up support for Q3 GDP.
Strength and breadth in export growth continues to justify further investment in capacity across numerous sub-sectors of manufacturing and the infrastructure which supports industry and society more broadly. Year-to-date fixed asset investment at June was a sub-par 3.9%. However, excluding the 10.1%ytd contraction in property, investment was up a strong 8.5%ytd. Underlying this result is 10.1%ytd and 11.7%ytd gains for high-tech manufacturing and high-tech services respectively. Utilities investment (including power generation and transmission) is meanwhile up 24.2%ytd and other infrastructure 5.4%ytd.
The above outcomes speak to the private sector and state-owned enterprises putting the Government’s long-term plan to increase value add and efficiency across the economy into action, targeting capacity expansion in areas where China has a nascent global competitive advantage such as goods production tied to the green transition. It is certainly paying dividends for industry, but the extent and timing of gains for ordinary households remains an open question.
The PMI’s employment measures and other labour market data make clear that aggregate employment is yet to materially benefit from this capacity expansion, new jobs in the sector at best offsetting weakness in residential construction and manufacturing sub-sectors that have lost their advantage to developing Asia. Firms exposed to local consumer demand also find themselves unable to scale up hiring or investment with spending growth weak and the outlook highly uncertain.
Although employment growth is largely stagnant, the NBS reports that household disposable income rose more than 5% on both a nominal and real basis over the year to June. With retail sales only up 3.7% year-to-date in H1 2024 (and just 2.0% over the year to June), a lack of job creation is clearly not the only factor holding back consumption and housing investment; anxiety over wealth is also critical. The latter is unsurprising given new and existing home prices have been falling consistently for close to three years and property investment is now down more than 20% since mid-2022.
There are two key points to take from the above. (1) Despite the headwinds created by the property sector and wealth, and in the absence of active support from the Government, to date in 2024 China’s ‘new economy’ has achieved authorities’ aggregate growth ambitions. (2) But, increasingly risks are skewing to the downside – growth in the new economy inevitably will slow and consumer weakness increasingly looks entrenched. Beginning with this week’s Plenum, it is important that authorities show greater initiative and urgency with policy so as to begin to rebuild trust in the property sector and to make clear that the benefits of trade will, in time, flow to all of society. Unlikely this week, but also necessary in time, is confidence in the outlook for China’s equity markets. A greater use of equity capital by firms and increased ownership of equities by households is the surest way to transmit trade gains broadly and sustainably across the economy.
As a result of the weakness in consumption and with considerable trade risks into year end, we have edged down our growth forecasts for 2024 and 2025, from 5.2% and 5.0% to 5.0% and 4.9%, respectively. Achieving these outcomes will require a material near-term policy adjustment to strengthen consumer spending and stabilise both residential construction and household wealth. If achieved, downside risks will abate and may turn net positive in 2025. But, if policy makers continue to hold back, risks are likely to skew further to the downside and begin to crystalise.
