China: Weak growth in Q2 leads to expectation of new economic stimuli

Under the pressure of the trade dispute with the USA, China’s economic growth continued to fall in the second quarter to 6.2 percent. It is probably the weakest value for more than a quarter of a century. At the beginning of the year, the economy had stabilised thanks to higher government spending. However, since these were primarily early expenditures, the effect quickly fizzled out. The growth setback now is also a consequence of the shortlived nature of these measures.

At the same time, the burden of mutual punitive tariffs is now considerable. China’s exports to the USA are currently just under 10 percent, while China’s imports from the USA are down by as much as 30 percent. The increase of the existing tariffs from 10 to 25 percent, which US President Trump ordered in May, is unlikely to have had any effect so far. The braking effects will not be felt until the middle of the year. The burdens on China’s export industry are likely to double again. It is certainly positive that the further escalation of the trade dispute has been averted and that US tariffs are not being extended to all imports from China for the time being. The headwind for the Chinese economy would otherwise be much stronger.

But even so, the Chinese government will have to significantly increase economic stimuli in order to maintain growth at at least 6 percent in the coming months, i.e. within the specified target corridor. Fiscal measures, however, are still barely discernible at present. At best, the higher growth again in the industry could be a first indication of new stimuli. We expect to see a stronger surge in this area soon. Monetary policy, on the other hand, is already paving the way for a more pronounced easing. The People’s Bank will follow a rate cut by the Fed at the latest, but is likely to lower minimum reserve rates further sooner.

At the turn of the year, the economy is likely to find its bottom, provided, however, that the truce in the trade dispute concluded at the G20 summit is also permanent. In the coming year, we expect economic growth of 6 percent, after 6.2 percent this year.

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