Analysis: Why China Faces Growth Slowdown Despite Strong Consumption

China’s economic growth is expected to slow down during the second half of 2024, influenced by growing trade tensions with the United States, weak performance in exports and industrial output, ongoing problems in the property sector impacting investment, and questions about the sustainability of a recent rebound in consumption. According to Fu Linghui, a spokesperson for the National Bureau of Statistics (NBS), uncertainties in the external environment remain significant, with domestic demand and underlying growth momentum still requiring strengthening. The overall foundation for a sustained economic recovery has yet to be solidly established. 1 2

May 2024 presented mixed economic results. On the positive side, retail sales—a key measure of consumption—grew by 6.4% year-on-year, the fastest pace since December 2023. This acceleration was somewhat unexpected and marked a notable improvement from April’s 5.1% increase. However, other indicators were less encouraging. Industrial production growth slowed to 5.8% year-on-year in May from 6.1% in April—the lowest since November 2023 and below analysts’ forecasts. Fixed-asset investment increased 3.7% in January-May, down from 4% in January-April, weighed down notably by a deepening 10.7% slump in real estate investment, while growth in infrastructure and manufacturing also moderated. 3 4

China’s goods exports in dollar terms rose by 4.8% in May, a marked slowdown from the 12.4% growth recorded in March. Exports to the United States took a particularly strong hit, declining by 34.6%, a direct result of heightened tariffs. This environment contributed to softer industrial sales for export. Nonetheless, a surge in retail sales was noted in sectors benefiting from government trade-in subsidies. For instance, household appliances and audiovisual equipment sales soared by 53%, and communication device sales jumped 33%. However, vehicle sales rose only 1.1% despite incentives, and other retail segments not covered by the subsidies saw lackluster growth. Factors such as the advancement of regional quota exhaustion and the boost from the annual Labor Day holiday, as well as the early start of the June 18 online shopping festival, contributed to the strong headline retail data and may not be sustained moving forward. 5 6 7 8 9 10 11

The easing of household concerns about the trade war, following a 90-day tariff truce announced on May 12, likely contributed to the uptick in consumption. As part of the truce, additional US tariffs on Chinese goods were temporarily cut to 30%, and China’s extra tariffs on American goods dropped to 10%. High-level talks in London and a consensus reached between Presidents Donald Trump and Xi Jinping provided some relief, yet the broader outlook remains uncertain as most tariffs remain elevated. 12 13

Looking ahead, most analysts forecast further headwinds for China’s economy in the second half of 2024, with expectations that both the rush to export ahead of potential tariff increases and the impact of trade-in programs will wane. Key macroeconomic challenges remain: persistent property market weaknesses, sluggish domestic demand, and ongoing trade uncertainties all signal a need for more policy stimulus. Economists at UBS and Morgan Stanley project additional fiscal and monetary measures will be needed—including potential interest rate cuts and a 500 billion yuan ($70 billion) special financing tool for policy banks. Even with such measures, real GDP growth may fall below 4.5% in the second half absent substantial new stimulus, likely making China’s “around 5%” annual growth target difficult to achieve. 16 17 18 19 20 21 22