China | Economic recovery moderated in Q2 amid fading reopening effect

China’s Q2 2023 GDP growth moderated to 6.3% y/y, suggesting the previous strong recovery momentum came to a halt in Q2 amid the fading effect of reopening.

Key points

• Key points:
• The main drag of the growth in Q2 came from retail sales, which slid significantly in Q2 after Q1 peak, indicating a sluggish market sentiment and consumer confidence amid households’ “balance sheet recession” in the post-pandemic time.
• This could be further verified by China’s June economic activities which display a very unbalanced structure, among which, industrial production bodes well, but fixed asset investment decelerated and retail sales significantly dipped from the previous readings.
• June inflation data (CPI: 0.0% vs. prior: 0.2%; PPI: -5.4% vs. prior: -4.6%) indicate that China is technically entering into a deflation cycle.
• The transmission mechanism from current expansionary monetary and fiscal measures to private investment and consumption growth is not smooth.
• To solve the above-mentioned problems calls for more monetary and fiscal policy support at the central government level in the rest of the year to help alleviate “balance sheet recession” of households and enterprises and to rebuild market confidence.

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