![](/sites/core/files/styles/standard_banner_xs/public/header/axa-im-insight-article-city-g1336639545_0.jpg?h=70eefa0f&itok=4sCD0r2P)
China reaction: Q2 GDP marks the start of The Third Plenum
- 15 July 2024 (5 min read)
Disappointing Q2 GDP brings questions and worries
China’s economy grew 4.7% yoy in Q2 2024, noticeably weaker than the 5.3% pace in Q1. This missed market expectations of 5.1% and our forecast of 5.0%. The quarterly growth pace slowed to 0.7% qoq from 1.5% in Q1, aligning with our expectations (with the quarterly growth rate for the last three quarters (Q1 2024, Q4 and Q3 2023) revised by -0.1ppt, +0.2ppt and +0.2ppt respectively). Despite the softer-than-expected Q2 GDP, the economy grew by 5.0% in the first half of the year, staying broadly on track to achieve the 5.0% annual growth target.
The slowdown in Q2 is attributed to broad-based economic weaknesses, with the most significant impact from domestic demand. There is a clear shift in GDP growth contributions from final consumption (private and government) to gross capital formation, the latter prompted by stimulus last year to arrest the weakening in activity but highlighting an increasingly unbalanced economy.
Private demand at its softest in recent months
Retail sales in June saw their first monthly decline since the end of 2022, -0.1% mom (+2.0% yoy). Sales of consumer goods rose by only 1.5% yoy, the slowest in the past 12 months, while sales of catering increased by 5.4% yoy, up from 5.0% in May. By commodity, sales of home appliances unwound the five-months consecutive growth, decreasing by 7.6% yoy in June – largely reflected a strong base effect. Sales of automobiles extended the decline to 6.2% yoy from -4.4% in May. Sales of services continued to ease, growing by 7.5% yoy year-to-date (ytd) in June, down from 7.9% ytd in May.
The weak retail sales print is unsurprising given the insufficient policy measures targeting domestic demand. The persistent drag from domestic demand is evident in various indicators, including subdued CPI inflation, soft credit demand, and declining imports. These trends point to pessimistic private demand and increasingly unbalanced economic development. Despite this, Beijing is unlikely to pivot its policy focus in the second half of the year, as the headline GDP growth remains on track.
Property market largely insensitive to policy rescues
Despite substantial support from Beijing in mid-May, property prices continued to decline nationwide. Prices for new homes decreased by 0.7% mom in June, while prices for secondary homes narrowed their decline marginally to 0.9% from 1.0% in May. Annual price declines for new homes extended to 4.9% in June from 4.3% in May, and the secondary market saw prices reduce by 7.9% yoy in June, down from 7.5% in May.
The property market's downturn, despite policy interventions, suggests that Beijing may need to explore other approaches, including boosting the labour market, especially wages, which could meaningfully revive households’ income expectation and boost domestic demand. However, we do not foresee a potential meaningful change in policy direction, and the property market is likely to continue its current trajectory in the near term.
Marginally quicker pace in industrial production and investment
China's industrial production picked up marginally in June, rising by 0.4% mom from 0.3% in May. Although the annual growth rate eased to 5.3% from 5.6% in May, this mainly reflected a base effect. Production growth was led by share-holding and private enterprises, rising by 5.9% and 5.7% yoy, respectively, while state-owned (SOEs) and foreign enterprises lagged, growing by 3.0% and 2.9% yoy, respectively. Manufacturing production drove the headline, up by 5.5% yoy in June from 6.0% in May.
Fixed asset investment (FAI) rose by 3.9% yoy in the first half of the year, easing from 4.0% in the first five months. Our calculations suggest FAI edged up in June, rising by 3.6% yoy from 3.5% in May, mainly driven by manufacturing capex investment, which increased by 9.3% yoy in June from 9.4% in May. Infrastructure investment also held up, though it moderated slightly to 4.6% from 4.9% in May. Real estate sector investment lagged, likely posting another double-digit drop in June from -11.8% in May.
Overall, industrial output and FAIs held up well in June, with some marginal deceleration in annual growth rates likely due to base effects. We expect the overall resilience in industrial output and FAIs to continue supporting GDP growth this year.
Weak domestic demand combined with strong production, but not seem to concern Beijing
Today's data highlight the weak domestic demand in China's economy, contrasting with resilient industrial production led by state-guided investment. This contrast stresses the output gap and economic imbalance. Yet, the KPI for government officials – the headline GDP growth target remains on track, this likely diminishes market hopes for a policy shift or strengthening from the Third Plenum meeting – and potentially the more tactical Politburo meeting later this month. Instead, the meeting is expected to focus on technological innovation (so-called ‘new quality productive forces’), green energy transition, and fiscal and SOE reforms.
The Third Plenum of the Chinese Communist Party, which takes place every five years, opened today in Beijing and will last for four days. Traditionally, the Third Plenum focuses on long-term economic development plans and reforms.
Related articles
View all articles
![](/sites/core/files/styles/364x205/public/header/axa-im-insight-article-landscape-g1036037598_3.jpg?itok=2_BZh0Ul)
ECB Preview: Another rate cut without more guidance
- by François Cabau, Hugo Le Damany
- 06 September 2024 (3 min read)
![](/sites/core/files/styles/364x205/public/header/axa-im-insight-article-building-g1196126435_1.jpg?itok=6ka7EUwC)
Ca reaction: BoC cuts again, Fed outlook provides free reign
- by David Page
- 04 September 2024 (3 min read)
![](/sites/core/files/styles/364x205/public/header/axa-im-insight-article-city-g488005850_1.jpg?itok=BJzlxZCw)
US reaction: Powell speech – getting into a hole?
- by David Page
- 23 August 2024 (3 min read)
![](/sites/core/files/styles/364x205/public/header/axa-im-insight-article-building-g641567122_2.jpg?itok=MeMKgnyZ)
US reaction: Inflation slowing in line, but nothing weaker
- by David Page
- 14 August 2024 (3 min read)
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.
Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ
In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
© AXA Investment Managers 2024. All rights reserved