China's economic slowdown continues to raise concerns, with July's data revealing a broader deceleration across key indicators. Retail sales growth, a crucial gauge of consumer spending, barely managed a 0.6% increase year-over-year, falling short of expectations and continuing a downward trend. This sluggish performance is a stark contrast to the 1% growth recorded in June and the 5% surge seen in the same period last year.
Urban fixed-asset investment, a vital component of the economy, contracted by 6.7% in the first seven months of the year, marking a steeper decline than anticipated. This negative growth is a significant departure from the 5.7% drop in the first half and the 6% decline predicted. The real estate sector, a major driver of investment, witnessed a 19.2% contraction, while infrastructure and manufacturing investments also shrank by 3.6% and 1.7%, respectively.
Industrial output, a key indicator of manufacturing activity, rose by 4.5% in July, missing the estimated 4.8% growth. This slowdown follows a 5.3% increase in June, indicating a broader cooling in the industrial sector. The urban unemployment rate ticked up to 5.2%, suggesting a potential increase in joblessness and further straining the economy.
The data release, scheduled for 3 p.m., instead of the usual 10 a.m., added to the concerns surrounding China's economic health. The supply-demand imbalance, a persistent issue, has been exacerbated by a prolonged property downturn and volatile energy prices. While industrial production and exports have been robust, fueled by the global AI investment boom, consumption and private investment have weakened.
The second quarter's GDP growth of 4.3%, the slowest since late 2022, further underscores the economic slowdown. Despite this, China's GDP growth in the first half of the year met the government's target range of 4.5%-5%. However, the broader slowdown in retail sales, investment, and industrial output raises questions about the sustainability of this growth.
Goldman Sachs attributes the retail sales slowdown to a government trade-in subsidy program that pulled purchases forward, now becoming a drag on consumption. The bank predicts weak sales growth in the second half, with full-year growth estimated at around 1.5%. New bank loans issued in July, typically a slow month, recorded the largest monthly decline on record, indicating persistent weakness in spending.
Household loans, including mortgages, also shrank in July, reflecting soft housing activity and a weak labor market. The jobs picture may be worse than official figures suggest, with a private survey indicating a broad unemployment rate of 10.2%, significantly higher than the official 5%. The survey also highlights the high youth unemployment rate, with over half of the long-term unemployed aged 16 to 24.
The slump in investment, particularly in urban areas, is a significant concern. Urban investment declined for the first time in decades last year, and the situation has worsened this year due to the property downturn and tighter borrowing constraints for local governments. This investment pullback is described as 'unprecedented' and poses a significant challenge to China's growth targets.
Factory and construction activity in July further lost momentum, with the manufacturing PMI contracting for the first time since February. Extreme weather events disrupted port activity and business operations, contributing to the decline. Despite this, exports remain a bright spot, with the global AI buildout and the Middle East conflict helping to offset headwinds.
China's massive trade surplus, reaching $687.4 billion in the January-to-July period, has become a point of contention for trading partners. The risk of fresh trade restrictions aimed at rebalancing trade from China is increasing. The country's trade surplus is on track to surpass another trillion dollars in 2026, raising concerns about the potential impact on the global economy.
In conclusion, China's economic slowdown is multifaceted, impacting various sectors and indicators. The government's challenge is to address the supply-demand imbalance, support consumption and investment, and manage the unemployment rate, all while navigating the complexities of the global AI investment boom and trade dynamics.
