Downbeat China Data Sparks Growth Forecast Cuts by Global Banks

A stream of data showing continued weakness in China's economy has sparked a flurry of growth forecast cuts by global banks, adding to the chorus of calls for policy makers to step up stimulus.

The downgrades to China's growth outlook come after it reported a sharper-than-expected slowdown in the second quarter of the year. The world's second-largest economy expanded 4.7% from a year ago in the April-June period, missing consensus views and decelerating from the 5.3% increase recorded in the first quarter.

The quarterly print, plus a mixed bag of economic activity data for June, suggest that China's lopsided recovery has lost some steam.

Economists at Goldman Sachs and Barclays now expect China's economy to grow 4.9% and 4.8% respectively this year, down from 5.0% previously. J.P. Morgan analysts have lowered their estimate to 4.7% from 5.2%.

Even at financial institutions that have refrained from cutting growth projections just yet, analysts say the bundle of downbeat data poses downside risks to their current estimates.

Many have raised questions about Beijing's ability to hit its annual gross domestic product growth target of around 5%, as policy measures show limited success in arresting a years-long property crisis that continues to dent consumer confidence. Though year-to-date GDP growth is tracking at 5%, in line with the annual target, the road ahead seems challenging, with unfavorable base effects posing obstacles in the second half of the year.

Alongside the second-quarter data, China also posted industrial production, investment, retail sales and housing market figures.

"The big disappointment came from retail sales," Barclays economists led by Jian Chang said in a note.

June's print dashed hopes of a fledgling demand recovery after May's rebound, missing market expectations by a wide margin.

That comes against a backdrop of labor-market deterioration, with new rounds of layoffs and pay cuts, plus slowing wage growth across various sectors, the Barclays economists said.

The continued slump in the property sector evident in home price and real-estate data also stands out, coming despite a bold policy rescue package rolled out by Beijing in May.

While authorities are headed in the right direction in addressing the housing crisis by pledging to tackle the massive inventory of unsold property and boost affordability, Nomura economists say they have yet to execute a plan to complete the millions of unfinished pre-sold homes standing idle.

Analysts say China will need to roll out more policy support if it wants to keep growth momentum alive and counteract weak domestic demand.

This is especially the case on the fiscal and housing fronts, Goldman Sachs economists said in a note. Fresh stimulus seems more likely to come at the end-July Politburo meeting, rather than at this week's Third Plenum summit, they said.

Fiscal aid, such as increased government bond issuances, may need to play a bigger role, as room for monetary-policy easing seems more limited, analysts say.

The People's Bank of China could opt to lower policy rates and banks' reserve requirement ratios, but the timing may be delayed as it keeps an eye on yuan depreciation and the historically low net interest margins Chinese lenders are facing, CreditSights analysts said in a note.

Any upcoming policy support faces the challenges posed by falling corporate profitability, more entrenched deflation expectations and pro-cyclical fiscal austerity that will weigh on consumption and private investment, the Barclays economists said.

And that's only at home. Looking beyond China's borders, the resilient external demand that has bolstered exports and helped offset weak domestic demand faces rising protectionism, economists at Citi warned.

As the weak second-quarter numbers show, "external demand is no substitute for domestic demand," they said.

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(END) Dow Jones Newswires

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