Chinese growth exceeds expectations in second quarter, but uncertainties remain

Despite the trade war launched by the US and lackluster domestic demand, the Chinese economy grew slightly faster than expected in the second quarter. While the 5% growth target for 2025 seems achievable, many weaknesses remain.

The Chinese economy grew slightly faster than expected in the second quarter, showing some resilience to the trade turmoil with the US. However, this moderate rebound masks persistent weaknesses and growing risks that could cloud the outlook for the second half of the year.

On track for 5% growth

According to figures released Tuesday by the National Bureau of Statistics (NBS), China's gross domestic product (GDP) grew 5.2% year-on-year between April and June, exceeding analysts' consensus (+5.1%) but slowing from the 5.4% recorded in the first quarter. On a quarterly basis, growth stood at 1.1%, again higher than forecasts (+0.9%) but lower than the 1.2% recorded in the previous quarter.

The strong momentum in the first half of the year should therefore enable Beijing to achieve its annual growth target of "around 5%."

As we explained yesterday, exports were once again a key driver of growth, despite the trade war. This can be explained by a phenomenon known as "frontloading": companies imported as many goods as possible from China during the first half of the year in anticipation of tariffs.

China thus recorded a record trade surplus of $586bn in the first half of the year, despite the fall in exports to the United States.

Chinese exports to the US fell by 34.6% in May and 16% in June year-on-year. Source: Bank of America

Headwinds

Nevertheless, several areas of weakness remain. On the consumption front, there was a recovery in the first half of the year. Retail sales rose by 5% over this period. However, June figures fell short of expectations, with an increase of only 4.8%, compared with the 5.4% anticipated.

While categories supported by government measures, such as household appliances, are performing well, the rest of consumption is sending mixed signals. A sustained recovery in consumption will require an improvement in consumer confidence, which remains at relatively low levels.

Sources: OECD, Trading Economics

Another worrying sign is that industrial deflation intensified in June, with a decline in producer prices not seen in nearly two years. This is hardly surprising in a country that has invested heavily in developing its production base and now finds itself with overcapacity in many sectors.

Finally, the real estate sector, which has been in crisis for four years, shows no real signs of recovery. Yet this sector accounted for a quarter of GDP in 2021. In June, prices fell at their fastest pace in eight months (-0.3% month-on-month). Despite government support measures, the market is still stabilizing.

Investors are now awaiting the conclusions of the Politburo meeting scheduled for the end of July, which will outline economic policy for the coming months. So far, the authorities have stepped up investment in infrastructure and consumer support, while continuing to gradually ease monetary policy.

However, these measures are likely to be insufficient and additional support appears necessary. Nevertheless, until the Chinese authorities have more clarity on US trade policy, no major announcements are expected. A deadline of August 12 has been set for tariffs on Chinese imports. But we know that Donald Trump has a habit of not meeting his own deadlines.