After a strong rebound in activity in the first quarter of 2023, China’s recovery has been sticking to the bone ever since. Weak sentiment has taken over, led by the housing sector, which is far from stabilizing. Consequently, the growth of industrial activity has softened, while activity in services has been maintained, but at a slower pace.
Uncertainty about the economic and employment outlook has dampened the confidence of Chinese households, hurting consumption and investment in housing. Monetary policy easing has been marginal and likely ineffective, given weak demand. “We see a modest stimulus package after the Politburo meeting in July as more likely if the GDP of the second disappoints. More central government spending would be positive, as well as further structural reforms to improve household consumption,” according to Mali. Chivakul, emerging markets economist at J. Safra Sarasin Sustainable AM.
The pace of recovery in China has slowed after the strong rebound in the first three months of the year. Weak investor and consumer confidence have gripped the country, while concerns about the real estate sector persist. After boosting home sales and construction earlier in the year, both have weakened again since April. In addition, real estate investment in the Asian giant fell by 7.2% in the first five months of 2023, worse than the 6.2% decline recorded in the period from January to April and higher than the expectations of economists who they expected a drop of 6.7%.
It seems that it is starting to smell scorched, taking into account that deflationary pressures are accelerating with the latest annualized CPI data at 0% and a negative producer price index (-5.4%). Given its large share in the economy, weak housing has stalled the recovery in industrial production and manufacturing PMIs have been subdued.
Weak business confidence, especially in the private sector, also means that earnings and employment expectations have fallen from their first-quarter highs. Although the rebound in the services sector has continued, sequential growth rates have slowed. Along these lines, the People’s Bank of China (PBoC) household survey for the second quarter is quite revealing. Both income and employment expectations fell from their reopening highs in the first quarter. Although the second quarter forecasts were still significantly better than 2022, they were lower than 2021.
Chivakul says that households expect house prices to continue to fall and have therefore reduced their demand for housing investment: “As housing investment accounts for the majority of Chinese household assets, prices Lower prices will have negative effects on wealth and hurt consumer spending,” he stresses. In this sense, there will have been some easing of fringe policy to deal with weak sentiment.
Tax incentives for the purchase of electric vehicles, for example, have been extended until the end of 2025 (half of the grants will be awarded in 2026-27). “Monetary policy easing is likely to be ineffective as demand for loans has fallen sharply since the first quarter rebound (…) Indeed, credit growth has slowed following the boost from debt issuance publishes and the creation of bank loans in the first quarter”, affirms the manager’s expert.
The tourism sector remains afloat
The only bright spot remains the travel and tourism sector. During the last holiday (the Dragon Boat Festival in June), tourism receipts were not as high as during the Labor Day holiday in May, but were still much higher than in 2022. It also suggests that households prefer increase its share of travel in overall consumption. Outbound flights have caught up early, but are still well below pre-pandemic levels.
For the second half, Chivakul expects the housing market to remain weak, as the government will let structural forces take over. “The demographic decline, the slowdown in urbanization and the relatively high indebtedness of households translate into a lower demand for housing,” he says. At the same time, the government is likely to continue tightening administrative policies (restrictions on home purchase and other restrictions) to ensure that the slowdown is not disruptive and that the price correction is gradual. The context hangs in uncertainty.
