tl;dr
China's economy slowed in Q2 due to trade disputes and a weak property sector, with growth forecasted at 5.1%, down from 5.4% in Q1. Challenges include declining exports, deflation, and tariff impacts, potentially reducing growth to 4.5% or lower in Q3 and risking annual targets. Beijing may introdu...
China’s economy experienced a slowdown in the second quarter following a strong start to the year, impacted by ongoing trade disputes and a prolonged slump in the property sector. This deceleration may prompt authorities to introduce fresh measures aimed at sustaining growth. Despite challenges, China has thus far avoided a significant downturn, supported by a tentative trade deal with the U.S. and current policy buffers. However, investor sentiment has grown cautious as the year progresses, influenced by slow exports, persistent price declines, and subdued consumer confidence.
Forecasts for Q2 indicate a 5.1% annual growth rate, down from 5.4% in Q1, according to the latest consensus. Morgan Stanley analysts note that while growth has been resilient so far, they expect it to soften in the latter half due to factors such as declining export momentum, ongoing deflation pressures, and tariff impacts. They project third-quarter growth could slow to 4.5% or below, with Q4 facing further headwinds, putting the annual growth target at risk.
In response, Beijing may announce additional fiscal stimulus, with Morgan Stanley anticipating a new package ranging between 500 billion and 1 trillion yuan by the end of Q3. June data showed some rebound in imports and a slight increase in exports, partially spurred by efforts to meet an early August tariff ceasefire deadline with the U.S. Meanwhile, factory activity and consumer spending are expected to slow further. The Reuters survey also predicts a quarter-on-quarter GDP increase of 0.9% in Q2, down from 1.2% in Q1, with growth moderating further to approximately 4.6% in 2025 and 4.2% in 2026, potentially falling short of official targets.
Investors are focused on the late-July Politburo meeting for signals on future policy directions and possible new economic support measures. Experts anticipate a 10-basis-point reduction in the People’s Bank of China’s seven-day reverse repo rate and a similar cut to the loan prime rate in Q4. So far this year, measures such as increased public works funding, expanded household subsidies, borrowing cost cuts, and liquidity injections have been implemented to cushion trade-related impacts.
Nonetheless, price declines persist, highlighted by a sharp drop in the June producer price index to levels not seen in about two years, underscoring ongoing deflationary challenges. Analysts expect officials to intensify efforts to reduce excess factory output and stimulate domestic consumption. However, cutting production poses risks of significant layoffs amid a weakening job market, complicating policymakers’ efforts to balance growth and employment stability.