China: Consumption pivot points to slower growth - Rabobank

Rabobank’s Teeuwe Mevissen highlights that China’s Gross Domestic Product (GDP) growth undershot expectations in Q2, with persistent headwinds from weak domestic demand and a deepening real estate crisis. The report argues Beijing will likely deploy renewed consumption subsidies and minor People's Bank of China (PBoC) rate cuts, but stresses that transitioning towards a consumption-driven model will mean structurally lower GDP growth over coming years.

Growth slows as model shifts

"China’s economy slowed more significantly than was generally anticipated, data showed in July. China’s GDP grew with 4.7% YTD which translates in 4.3% YoY while economists predicted 4.8% YTD and 4.5% YoY respectively."

"While retail sales and imports surprised to the upside, we believe that we cannot yet conclude that domestic demand has turned the corner and has embarked on a sustainable recovery. One only has to look at the price developments in the real estate sector to raise serious doubts."

"Indeed, it is the same real estate crisis that is the main reason for suppressed consumer sentiment and consequently, retail sales. We therefore think it is likely that we will see a return of subsidies and measures that incentivise consumption. Moreover, we also continue to stick to our off consensus forecast of two minor PBOC rate cuts of 10 bp each for the remainder of this year."

"Going forward we expect China’s trading partners to be increasingly unaccepting of the current trade relationship. This unease will also increasingly include countries from the so called Global South. We therefore think that sooner rather than later, China will need to implement serious reforms and transition its economy away from the current model that emphasizes investments and exports towards a model that is more reliant of domestic consumption."

"We expect this will lead to gradually declining economic growth for the years to come. The resulting economic growth is also likely to be below China’s growth target of between 4.5 and 5% economic growth. While we do expect China’s economy to grow with 4.5% this year, we expect next year growth to be around 4.2%."

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