Barclays warns of Japan-style recession risk for China
Investing.comFri, Aug 16, 2024 at 5:20 PM GMT+83 min read
Investing.com -- China's economy is currently caught in a vicious cycle characterized by a slowdown in investment, production, and consumption, compounded by a deteriorating labor market and declining property values.
As per analysts at Barclays, these factors have heightened concerns about a potential Japan-style balance-sheet recession, posing significant downside risks to China's GDP forecasts.
Despite expectations of 4.8% growth, the outlook remains bleak unless more robust and concerted policy measures are implemented to stabilize the situation.
Economic slowdown and key factors
The Chinese economy has been struggling with several interlinked challenges that are exacerbating the slowdown. The July 2024 activity data confirm a weak start to Q3, with industrial production growth decelerating, property investment contracting further, and retail sales remaining subdued.
“Despite a very low year-earlier base, retail sales growth remained firmly below 3% for the second straight month,” the analysts said.The industrial production growth rate also moderated to 5.1% year-on-year in July, slightly below expectations.
On the investment front, Fixed Asset Investment (FAI) growth has been disappointing, falling to a nine-month low of 2% year-on-year in July. This slowdown has been driven by worsened property investment and softer manufacturing investment, only partially offset by a slight pickup in infrastructure investment.
The July data also reported a continued decline in private credit demand and a negative GDP deflator for the fifth consecutive quarter, underscoring the deflationary pressures in the economy.
Real estate sector in crisis
The real estate sector, a critical pillar of China's economy, remains mired in a prolonged contraction. Despite policy measures introduced in May 2024 to stabilize the market, housing activity continues to decline.
Property investment slumped by 10.8% year-on-year in July, with new property sales falling by 15.4% year-on-year, deepening the contraction observed in the previous months.
Additionally, the market for new property sales in 30 major cities fell further in August, indicating that the housing market correction is far from over.
Labor market and consumption weakness
China's labor market has also shown signs of deterioration, with the urban unemployment rate rising to 5.2% in July. This worsening labor market is contributing to weak consumer confidence, as reflected in the tepid retail sales growth.
Despite government efforts to stimulate auto purchases, auto sales have contracted for the fifth straight month. Moreover, the ongoing downturn in the housing market has led to a contraction in property-related retail sales, further weighing on overall consumption.
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