Key Takeaways

  • A soft Q2 GDP growth rate confirmed that China’s recovery lost momentum, while revisions to previous data reduce the ‘statistical carry’ and therefore pull down on our annual growth forecast.
  • Our China Activity Indicator (CAI) declined again in June, consistent with services exhausting their easy gains. In contrast, the industry, real estate & trade sub-index stabilised on net.
  • The big question is what is going to drive growth forward. Real estate has become a major drag once again and the monthly data series showed activity dropping below November’s lows in June.
  • The consumption recovery should still have room to run: households have yet to normalise their saving rate, let alone tap the excess savings built up over the pandemic. And if confidence returns, it could still unlock strong activity in H2 and beyond.
  • But there is little sign of it in the latest data: we estimate retail sales fell 4% on the month, while services have been broadly flat for the past four months and surveys imply that cautious income and employment expectations will keep savings on the side-line.
  • Weak growth, inflation running well below target and rising youth unemployment increase the chance of policy makers stepping in with a more substantial support package. 
  • But a continued focus on de-risking and self-sufficiency implies stimulus will remain insufficient and piecemeal. As a result, we have trimmed our 2023 GDP forecast to 5.1% (-0.5pp).

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