China's economy is expected to have slowed in the first three months of the year as the country continues to be plagued by a debilitating real estate crisis and slowing consumer activity.
Last month, Beijing officials set a growth target of around 5 percent for the year – a target they admitted would be “not easy” and that analysts called ambitious given the headwinds the country faces.
But there are some bright spots – last month's figures showed that industrial production surged despite continued sluggish consumption, reflecting the uneven recovery China has seen since exiting growth-sapping zero-Covid policies in early 2023.
And analysts on Tuesday expected China to post growth of around 4.6 percent in the first quarter of the year, compared with 5.2 percent in the final three months of last year.
Analysts surveyed by Bloomberg expect a figure of 4.8 percent.
Troubles in the real estate market remain a bedrock of the economy, analysts said, as property prices continued to fall and top developers such as Country Garden and Vanke sent distress signals about their profits and challenges paying down debt.
“Prolonged weakness in the real estate sector and subdued household consumption, driven by negative wealth effects from the housing correction and somewhat sluggish income growth,” will weigh on growth, Fitch Ratings chief economist Brian Coulton told AFP.
Policymakers have announced a series of targeted measures as well as the issuance of billions of dollars in government bonds to boost infrastructure spending and boost consumption.
But analysts say much more needs to be done, in the form of a “bazooka” stimulus package.
“The stimulus is limited (both monetary and fiscal), so the impact will be limited,” Alicia Garcia Herrero, chief Asia-Pacific economist at French investment bank Natixis, told AFP.
“We do not expect major interest rate cuts or large fiscal stimulus as the scope for China to do both is limited,” she added.
– “Very pessimistic” –
Ratings agency Fitch this month downgraded China's sovereign credit outlook to negative and warned of “increasing risks to China's public financial outlook” as the country grapples with a “more uncertain economic outlook.”
And observers say government pledges of support for the real estate sector may not yet influence the market or consumers.
“Homebuyers remain very pessimistic,” Gene Ma, head of China research at the Institute of International Finance, told AFP.
Sluggish consumption is another problem.
Last month, retail sales – the main indicator of household consumption – rose 5.5 percent year-on-year, down from the previous month, despite it being a holiday season when there is usually a spike in spending.
“A lack of domestic consumer demand will continue to slow growth despite an improvement in industrial production,” Moody's Analytics analyst Heron Lim told AFP.
Fears that China could slip back into deflation were also a major negative factor.
Consumer prices fell for several months starting in August before rising 0.7 percent in February.
But the consumer price index rose just 0.1 percent year-on-year last month, reigniting fears of deflation.
While deflation suggests that goods were cheaper, it poses a threat to the overall economy as consumers tend to postpone purchases in the hope of further price reductions.
A lack of demand can then force companies to cut production, stop hiring or lay off workers, and potentially have to reduce existing inventory levels at the same time – affecting profitability despite the same costs.
“Inflation is the fever of an economy, while deflation is a cancer,” Ma said. “Prolonged deflation will impact consumption and investment demand.”
Manufacturing was a bright spot in the first quarter, analysts said, pointing to strong official data from March.
“Our proprietary indicators suggest more robust manufacturing activity than construction activity,” Goldman Sachs' James Seddon told AFP.
“Relatively positive industrial production and export news means growth will remain stable this quarter,” Moody's Lim told AFP.
Still, he warned that more government support is needed in the medium term to boost growth as there are “few policy supports aimed at directly supporting domestic consumption.”
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