Wall Street banks cut China's growth forecast after dull second quarter

J P Morgan, Morgan Stanley and Citigroup trimmed China's growth forecast for 2023 after the country's economy grew at a weaker pace in the second quarter, with its post-Covid momentum unravelling rapidly.

Data on Monday showed China's economy grew 6.3 per cent in the second quarter on a year-on-year basis, accelerating from 4.5 per cent in the first three months of the year, but well below expectations of 7.3 per cent, as demand weakened at home and abroad.

"Market scepticism on China's growth outlook is on the rise," said Morgan Stanley economists led by Robin Xing.

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Demand weakness in China could ripple across developed and developing economies, raising the need for more fiscal stimulus from Beijing - a delicate task as any aggressive stimulus could fuel debt risks and structural distortions.

JPM cut China's Gross Domestic Product (GDP) forecast to 5 per cent from 5.5 per cent. The bank tempered its outlook on the property industry too, with no turnaround in sight yet. The biggest cuts were in new constructions, with JPM now expecting a contraction of 20 per cent this year. They earlier projected new starts shrinking by 7 per cent.

The bank estimates that a 10 basis point (bps) policy rate cut in the fourth quarter, and nationwide housing policy easing, including a relaxation of down-payment requirements, are possible steps the government could take to boost economic growth.

Citi, meanwhile, expects a 20 bps cut in the policy rate and 25 bps in the reserve requirement ratio (RRR) by the end of the third quarter.

"We certainly need more significant measures to keep growth on track," Citi's chief China economist, Xiangrong Yu said.

"The mid-year Politburo meeting will be a window to read the latest policy thinking, but we are also mindful of risks that policy could fall behind the curve or short of expectations."

Morgan Stanley cut its forecast for China's GDP from 5.7 per cent, and also trimmed its 2024 forecast for the country by 40 bps to 4.5 per cent. This implied a return to China's post-Covid potential growth trend, MS economists said.

Goldman Sachs, however, maintained its 2023 full-year GDP growth forecast at 5.4 per cent, even as they cut their current-quarter growth forecast to 5.5 per cent on a quarter-on-quarter basis from 6.5 per cent previously.

"Some negative factors may fade in Q3 and policymakers have stepped up their easing measures, implying a potential rebound in sequential growth ahead," GS economists led by Lisheng Wang said.