Favourable base effects boosted China’s Q2 economic growth of 6.3%.
China’s economy recorded a 6.3% annual growth rate in the second quarter, primarily driven by favourable base effects that contributed to an inflated year-on-year figure.
While the growth rate appeared robust compared to the same period last year, the sequential momentum indicated signs of fragility and pointed towards weakening demand.
The second quarter’s gross domestic product (GDP) expansion of 6.3% outpaced the 4.5% growth in the previous quarter, marking the fastest growth rate observed in the past year, as per official government data released Monday.
However, this figure fell short of analysts’ expectations, raising concerns about the economy’s future performance.
The reliance on base effects, which occur when comparing data to a lower base from the previous year, significantly magnified the year-on-year growth rate.
This effect is particularly relevant considering the severe economic downturn experienced in the second quarter of 2020 due to the COVID-19 pandemic.
Despite the encouraging year-on-year growth, the sequential momentum of China’s economy raised doubts about its sustained recovery.
Weakening demand was indicated, suggesting potential challenges ahead. Analysts anticipate that the growth rate may lose momentum in the upcoming quarters, posing further challenges for China’s economic trajectory.
Overall, while China’s second-quarter economic growth appeared strong on the surface, it was primarily influenced by base effects, and underlying weaknesses in demand and sequential momentum cast doubts on the sustainability of the recovery.
Louis Kuijs, Chief Asia Economist at S&P Global, expressed difficulty in interpreting the GDP data released by China.
While the year-on-year growth rate fell significantly below his expectations, the quarter-on-quarter figure, as the National Bureau of Statistics (NBS) reported, exceeded his projections.
Kuijs mentioned the possibility of data revisions in earlier periods that could have influenced the results.
One notable observation made by Kuijs was the disappointing performance of the consumption side of China’s economy.
He highlighted that despite witnessing double-digit growth in retail sales in April and May, driven by a low base from the previous year, the momentum had subsided, with nominal retail sales growth reaching only 3.1%.
This indicated that consumers remained hesitant and cautious in their spending behaviour.
Comparing China’s GDP growth to that of India, the world’s second-largest economy, China’s 6.3% expansion in the second quarter outpaced India’s 6.1% economic growth recorded from January to March.
However, data for India’s April to June period was yet to be released, with expectations for it to become available in the following month.
In conclusion, Louis Kuijs expressed challenges in interpreting China’s GDP data, with discrepancies between the year-on-year and quarter-on-quarter figures.
The underwhelming performance of consumption and retail sales growth suggested consumer reluctance, while China’s growth outpaced India’s highlighted position as the world’s largest economy.
The National Bureau of Statistics in Beijing stated that China’s economy displayed a favourable recovery momentum, reflecting positive sentiments regarding its recent performance.
The significant year-on-year surge in GDP can be attributed to the fact that a year ago, China’s economy grew by a mere 0.4% due to stringent lockdown measures imposed during the worst COVID-19 outbreak.
However, compared to the previous quarter, the economy expanded by 0.8% in the second quarter of this year.
Analysts had initially anticipated that the growth rate for the quarter ending in June would exceed 7%, setting higher expectations for the country’s economic rebound.
However, the actual growth rate fell short of these forecasts. As a result, the Chinese yuan experienced a decline of approximately 0.37% against the US dollar, reaching its lowest level in eight months. The strengthening of the US dollar and a series of disappointing economic indicators from China influenced the yuan’s weakening.
Year-to-date, the yuan has depreciated by over 3% against the dollar. Concurrently, Chinese stocks experienced a decline, with both the Shanghai Composite Index and the blue-chip CSI 300 Index dropping by more than 1%.
China’s GDP growth in the first quarter surpassed expectations, achieving a 4.5% increase.
A surge in consumer activity fueled this growth, as individuals flocked to shopping malls and restaurants following the removal of nearly three years of “zero-COVID” restrictions at the end of 2022.
However, analysts anticipate a slowdown in growth, especially considering the second quarter’s substantial 12.4% decline in exports.
In summary, despite exhibiting a positive recovery momentum, China’s economic performance fell short of analysts’ expectations. The year-on-year surge was primarily attributed to the low base effect from the previous year’s pandemic-induced economic contraction.
Nevertheless, concerns remain as the growth rate failed to meet projections, resulting in currency depreciation and a decline in Chinese stock markets. Additionally, export slumps and anticipation of a growth slowdown further contribute to the cautious outlook for China’s economy.
