Weaker-than-expected domestic consumption demand weighed on China’s second-quarter GDP growth, leading to falls in European stocks exposed to the Chinese market and prompting some investors to lower expectations of future rate hikes by the central bank.
Key takeaways
- With ripple effects around the world, China’s GDP growth for Q2 was lower than expected due to weak demand and a lagging property sector.
- European stocks and oil tumbled in response, both linked to Chinese demand.
- In the US, analysts lowered expectations of a federal interest rate hike as China’s central bank has already cut rates.
- The Chinese government said it would institute measures aimed at boosting incomes and rural consumption, encouraging consumption of cars and electronics, and increasing youth employment rates.
China’s gross domestic product rose 6.3% in the second quarter, while analysts had expected a 7.1% increase. European stocks, which typically have more exposure to China than the U.S., lagged in response. The French CAC 40 fell 1.1% in the same period, as the index concentrated on luxury goods, which are affected by shifts in Chinese demand. LVMH (LVMUY) and Hermes International SA were some of the worst performing stocks during that time.
U.S. stocks, except those heavily tied to China, were generally underperformed. However, China’s economic recovery is faltering as analysts at Deutsche Bank dialed back expectations for Chinese GDP growth to 5.3% from 6.0% in 2023 and 5.0% in 2024 from 6.1%.
Despite widespread inflation elsewhere, China could face the risk of deflation as the central bank has already cut interest rates. Beijing’s moves to stimulate growth prompted a small decline in futures prices for the central bank’s terminal rate later this year.
China’s disappointing growth sent oil prices down 1.5% on Monday as investors questioned the appetite of the world’s second-largest oil consumer.
China’s sluggish recovery is attributed to two factors: weak private consumption and a faltering property sector. Chinese property investment in the first half of 2023 is down 7.9% from a year earlier amid the credit crunch.
Analysts at Oxford Economics expect the Chinese government to adopt monetary and fiscal easing measures, such as local government special bonds, to stimulate infrastructure development. Officials from China’s National Development and Reform Commission said Tuesday that the government aims to boost incomes, stabilize youth employment, expand rural consumption and improve automobile and electronics buying trends.