Goldman Sachs and Citigroup have revised their full-year estimates for China’s economic growth to 4% after the industrial output of the world’s second-largest fell to a five-month low in August 2024.
The month of August’s lacklustre economic performance has drawn more attention to China’s sluggish economic recovery and underlined the necessity of additional stimulus measures to support demand.
Measures of factory output, consumption and investment all slowed more than economists had forecast, while the jobless rate unexpectedly rose to a six-month high.
Due to the slowing growth, international brokerages have lowered their 2024 projections to less than the government’s target of about 5%.
Previous estimates for the economy’s full-year growth were 4.9% for Goldman Sachs and 4.8% for Citigroup.
According to data released by the National Bureau of Statistics (NBS), China’s industrial output increased by 4.5% year over year in August, down from a 5% growth rate in July and the slowest growth since March.
A major indicator of consumption, retail sales, increased by 2.1% in August after rising by 2.7% in July due to severe weather and a peak in summer travel. Retail sales, which have been weak all year, were predicted by analysts to increase by 2.5%.
“We believe the risk that China will miss the ‘around 5%’ full-year GDP growth target is on the rise, and thus the urgency for more demand-side easing measures is also increasing,” Goldman Sachs said in a note.
The American multinational investment bank also upheld the 4% GDP growth estimate for the nation in 2025. However, because there aren’t many significant drivers of domestic demand, Citigroup reduced its 2025 year-end estimate for China’s GDP growth to 4.2% from 4.5%.
“We believe fiscal policy needs to step up so as to break the austerity trap and timely deploy growth support,” economists at Citigroup said.
The weakening has further darkened the growth outlook for the world’s second-largest economy, whose post-COVID recovery fairy tale lost its steam a year back, fuelling calls for a more aggressive policy response by the 2024 end.
“The August data basically rules out the chance to attain the official target of 5% growth in 2024, unless the top leadership is willing to launch a bazooka stimulus package,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd.
“Home prices fell at the fastest pace since 2014, reflecting weak confidence that’s weighing on demand and threatening to draw China into a deflationary spiral. A string of rate cuts has done little to stimulate borrowing, indicating anaemic consumer and business sentiment,” reported Fortune Media.
“As we are already toward the tail-end of the third quarter, time is running low for policymakers to introduce measures to buoy the economy amid numerous headwinds,” Lynn Song, chief economist for Greater China at ING Bank NV, wrote in a note.
While China’s GDP will most likely continue to grow at the lower end of Beijing’s 5% goal target, economists have been calling for the Xi Jinping administration to do more to avert falling into stagnation akin to Japan’s “lost decades.”
As per the analysts, industrial production, the main driver of the Chinese economy so far in 2024 (bolstered by exports and government support) is losing steam. More challenges may arise in the coming days as trade tensions intensify over complaints about Chinese overcapacity by the United States and other major Western partners. Not to forget that the entire Western Bloc right now has taken the path of tariff warfare to prevent their markets from being overrun by Chinese goods.
“If external demand can stay resilient for a little longer we could see some resilience, but given incoming tariffs and slowing global momentum we are erring on the side of caution,” ING’s Song said, while warning that the auto sector may “move from a tailwind to a headwind,” given that the volume of car output fell 2.3% in August 2024 compared to the same period in 2023.
While state capital-driven investment has been slowing, the deterioration in the private sector was even worse. Private investment fell 0.2% on year in the January-August 2024 period, registering its first decline this year, government data showed.
The People’s Bank of China (PBOC) has already indicated about stepping up its fight against deflation and prepare additional policies to revive the economy. President Xi has reportedly urged government officials to “conscientiously implement” existing economic policies for the rest of the year to achieve full-year economic and social development goals.
Economists widely expect the PBOC to ease monetary policy in the coming days, including by reducing the amount of cash lenders must keep in reserve. The central bank could also lower the interest rate on policy loans to reduce banks’ funding costs.
“With confidence low and deflation risk significant, the kind of monetary policy action the PBOC would contemplate is unlikely to make a substantial difference,” said Louis Kuijs, chief Asia-Pacific economist at S&P Global Ratings, while adding, “Fiscal policy stimulus would be more appropriate and effective.”