China set to miss annual growth target

Summary

Recent GDP and activity data from China were underwhelming, and as a result, we have revised our 2024 annual GDP growth forecast lower. With activity sluggish and price pressures still subdued we reiterate our view that the People's Bank of China (PBoC) will ease monetary policy again in the coming months and over the course of 2025. Lower interest rates have been a source of renminbi depreciation; however, policymakers have mounted an effective defense of the currency as appetite for a weaker currency seems limited. Longer-term, we remain optimistic on the prospects for the renminbi despite underwhelming initial takeaways from China's Third Plenum.

Revising down our China GDP growth forecast

Following relatively steady activity over the course of the first few months of this year, China's economy has since demonstrated a renewed downturn. Most sentiment and activity indicators have tailed-off during the last few months, ultimately culminating in a recent GDP print that was nothing short of underwhelming. In Q2-2024, China's economy grew 4.7% year-on-year—well below our forecast as well as consensus expectations—and a notable slowdown relative to Q1. At first glance, weak domestic consumption seems to be the primary driver of China's softening economic momentum. Retail sales were especially weak in June, but missed expectations for most of the second quarter. Persistent subdued inflation/disinflation pressures, a real estate sector that remains in correction, as well as household preferences to save, all contribute to a local backdrop that is not conducive to spending. China's recent economic slowdown may be driven by soft consumption, although pockets of weakness exist outside of consumption. China's manufacturing sector remains in contraction territory, while capital formation and conditions for inbound investment also appear to be sluggish and restraining overall economic growth. Exports have been supported recently; however, we continue to believe China is gradually becoming a less integral part of the global supply chain. Over time, China being replaced as the manufacturer to the world can challenge China's export-led economic model over the medium-to-longer term. Incorporating recent GDP data into our forecast profile for China's economy leads us to downwardly revise our 2024 annual growth forecast. To that point, we now forecast China's economy to grow 4.8% this year, down from 5.1% before the latest data releases. Given the sheer size and importance of China to the global economy, all else equal, this downward revision will also have negative implications for our global GDP forecast.

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