China's Economic Growth Forecast Downgraded

Chinese Economy Slows Down as Real Estate Market Weakens

China's economic outlook has taken a notable hit, as the latest report by economist Wang Tao has downgraded the growth forecast for the country. The projection for 2024 has been lowered from 4.9% to 4.6%, and the forecast for 2025 has been reduced from 4.6% to 4.0%. The primary factors behind this revision are the continued decline in the real estate market and sluggish domestic demand.

Despite stronger-than-expected export performance, largely driven by a global tech upswing, the real estate sector's ongoing struggles are weighing heavily on the economy. The loosening of real estate policies, including reductions in down payment ratios and loan interest rates, has not been effective in reversing the downward trend. Instead, sales and new construction have seen significant declines, leading to lower consumer and business confidence. Real estate sales fell by 19% year-over-year in the first seven months of the year, and new construction dropped by 23%. This has been compounded by a 22% decrease in land sale revenues, signaling a broader economic malaise.

The sluggishness in real estate has led experts to express concerns about China's overall economic health. S&P Global Ratings has warned that if property sales continue to fall, China's GDP growth could dip below 3% in 2024. The International Monetary Fund (IMF) has also adjusted its growth forecast for China, now predicting a more modest 4.2% growth in 2024 due to the property sector's difficulties.

Efforts by the Chinese government to stabilize the market, such as mandating the sale of completed homes and allowing local governments to issue bonds for purchasing unsold properties, have been met with skepticism. These measures, while offering temporary relief, are not seen as addressing the fundamental issues plaguing the market. Experts argue that without more substantial interventions, the real estate sector's problems will continue to drag on China's economic growth.

Overall, the consensus among analysts is that China’s economy faces significant challenges ahead. The real estate sector, once a key driver of growth, is now a major source of financial instability, and without more effective policy measures, the country's economic outlook remains uncertain.

Key Takeaways

• The GDP growth forecast for 2024 has been revised down to 4.6%, and the forecast for 2025 has been adjusted to 4%, mainly due to the downturn in the real estate market and weak domestic demand.
• Forecasts for real estate sales and new construction have been revised downward, anticipating a more substantial drag on the economy than initially expected, affecting consumer spending.
• Despite the stronger-than-expected performance in exports, the slow implementation of real estate policies has had limited impact.
• The prediction for the GDP deflator index has been reduced, indicating that deflation or low inflation pressures are expected to persist for an extended period.
• The issuance of government bonds has accelerated, but the expansion of implicit debt has been limited, and fiscal policy execution has been tightened.

Analysis

The slowing of the Chinese economy is a result of the dual impact of the sluggish real estate market and weak domestic demand. Despite the loosening of real estate policies, their limited effectiveness has led to a sharp decline in sales and new construction, dragging down GDP growth. In the short term, sluggish real estate activities and consumer confidence are suppressing consumption, while in the long term, they may exacerbate deflationary pressures. Fiscal austerity and government debt management have restricted the strength of stimulus measures. Although the global tech cycle has boosted exports, weak domestic demand and real estate risks remain the primary challenges. Without timely policy adjustments, economic recovery may be impeded, affecting consumer spending, business investment, and government fiscal revenue.

Did You Know?

• GDP Deflator Index Forecast Downward Revision
  • Explanation: The GDP deflator index measures a country's overall price level and is used to calculate the difference between real GDP and nominal GDP. A downward revision in the GDP deflator index forecast indicates an expected overall decrease in price levels, signaling potential deflation, which suggests insufficient total demand in the economy leading to widespread price declines. This situation could have a negative impact on the economy as it may cause consumers and businesses to defer spending, further suppressing economic growth.
• Limitation on Expansion of Implicit Government Debt
  • Explanation: Implicit government debt typically refers to debt incurred by the government through various informal channels that is not directly included in the official government debt statistics, such as borrowing through local government financing platforms or state-owned enterprises. When the expansion of implicit government debt is restricted, it indicates that the government's ability to increase debt through these unofficial channels is limited, potentially due to policy adjustments or strengthened regulations. This limitation may affect the government's financial flexibility, restricting its ability to stimulate the economy through increased spending during economic downturns.
• Slow Inventory Reduction Process
  • Explanation: Inventory reduction refers to the process of reducing surplus inventories in businesses or markets. In the real estate market, inventory reduction typically pertains to decreasing the unsold inventory of new residential or commercial properties. A slow inventory reduction process suggests that the surplus inventory in the real estate market has not diminished rapidly, possibly due to weak demand, oversupply, or low market confidence. A sluggish inventory reduction process could lead to financial pressure on real estate developers, further impacting their investment and development activities, thus having a negative effect on the overall economy.