July 15 (Reuters) – China’s annual economic growth slowed sharply to 4.3% in the second quarter, official data showed on Wednesday, missing analysts’ expectations as weak domestic demand and the oil shock tied to the Iran war outweighed stronger production and exports.
Analysts polled by Reuters had forecast the April-June quarter gross domestic product (GDP) would expand 4.5% from a year earlier, cooling from a 5.0% gain in the first quarter.
The second-quarter year-on-year growth marked the slowest pace since the fourth quarter of 2022 when China was grappling with the COVID-19 pandemic. KEY POINTS
* Q2 GDP +4.3% y/y (f’cast +4.5%, Q1 +5.0%)
* Q2 GDP +0.9% q/q (f’cast +0.9%, Q1 +1.3%)
* June industrial output +5.3% y/y (f’cast +4.7%, May +4.5%)
* June retail sales +1.0% y/y (forecast -0.1%, May -0.6%)
* H1 fixed asset investment -5.7% y/y (forecast -4.9%, Jan-May -4.1%)
* H1 property investment -18.0% y/y (Jan-May -16.2%) COMMENTARY
KENNETH GOH, DIRECTOR OF PRIVATE WEALTH MANAGEMENT, UOB KAY HIAN, SINGAPORE:
“Reviving consumption is the harder job. It takes time to rebuild household confidence.
“On the ground, factories are busy, but shoppers are pickier, watching value closely. Confidence is coming back slowly.
“Expect policy to lean more on direct household support, fiscal transfers, safety nets, property stabilisation, rather than more infrastructure spending. Rate cuts alone haven’t been enough to move behaviour.”
TONY SYCAMORE, ANALYST, IG, SYDNEY:
“This (Q2 GDP growth of 4.3%) is a big miss, but what I do think it will do is it will likely see the July politburo meeting signal an acceleration of fiscal rollout for quarter three because they’re now well below their target. I think the focus will be on the strategic infrastructure under the six networks initiative… but yes, to me it doesn’t look like things are getting any better over three.
“I would be concerned about it. I mean, if you were in Australia and you saw 36 months of housing prices decline, that’s three years; we’d be rioting on the streets.”
WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE:
“The encouraging thing is that retail sales and industrial production actually rebounded quite strongly and more than expected… but the overall outlook is still not very good at this point.
“I would expect them to do something about this in order to help stabilise the economic momentum in the second half of the year.
“I don’t think they will be worried enough to announce any big stimulus, but it is going to be targeted, since they are aware that growth is only for the tech areas whereas the broader economy is continuing to underperform. So, it is likely that the measures will be looking more at the consumption side.”
GARY NG, SENIOR ECONOMIST FOR ASIA PACIFIC, NATIXIS, HONG KONG:
“There is no question about the tough macro outlook. Consumers are less willing to spend money unless it is for basic goods. There is also a reduction in investment as the rebound in the property sector remains unclear, and more manufacturing firms are rolling back operations to cope with overcapacity. Still, AI-related sectors are the exceptions with strong demand and growth.
“Even if China’s economic growth rate remains flat at 4.3% in H2 2026, it can still fall within the lower end of the full-year target. As China’s policy focus has shifted from GDP growth to innovation, security, and competition with the U.S., we may see only a moderate increase in stimulus to keep the economic engine running. However, it is unlikely to see a major shift in policy stance, but rather just fine-tuning.”
SHIER LEE LIM, LEAD FX AND MACRO STRATEGIST FOR APAC, CONVERA, SINGAPORE:
“China’s Q2 GDP miss… strengthens the case for additional policy support at the July Politburo meeting. The composition tells the real story: consumption and industrial output surprised positively, but fixed asset investment is contracting at an accelerating pace, and property investment falling 18% shows the sector remains the structural drag.
“Markets will now price in a more forceful policy response – the question is whether support targets demand or, once again, supply. For the yuan, policy easing expectations should cap appreciation momentum near-term.”
FABIEN YIP, MARKET ANALYST, IG, SYDNEY:
“Growth is still very much powered by manufacturing. What the government wanted to achieve earlier this year, when it set the GDP target, it actually wanted to improve consumption… That story hasn’t really played out yet, and it’s also been a bit disappointing that there hasn’t been a lot of strong stimulus package.
“There’s a bit more pressure on the government to put out more material support for the market.
“Unfortunately, I still see the consumer sector as well as domestic demand at a pretty fragile stage for now… so far, we’ve not had any rate cuts from the central bank. While they talked about being nimble and there is flexibility to cut rates, we haven’t really seen significant moves from the central bank, so I think that will also come into focus later in the year.”
ANDY JI, ASIAN FX & RATES ANALYST, ITC MARKETS, SHANGHAI:
“The primary drag on the headline growth figure stems from a deepening downturn in domestic investment activity.
“Overall, a high-tech-driven industrial engine running alongside cratering domestic consumption and investment firmly highlights the economy’s deeply uneven growth momentum. For policymakers, this imbalance delivers an imperative to pivot away from purely supply-side stimulus. With private investment plunging and property development cratering, reliance on wholesale monetary easing alone will be unable to reignite sluggish domestic demand.”
JUNYU TAN, NORTH ASIA ECONOMIST, COFACE, HONG KONG:
“Overall, Q2 data highlights a deepening divergence between domestic and external demand. Export outperformance was still underpinned by AI hardware and green-tech demand, while domestic demand is being weighed down by the prolonged property slump.
“That being said, June data showed some signs of stabilisation in domestic activity – retail sales were supported by accelerated trade-in subsidies, while the pace of decline in fixed investment slowed marginally. But this rebound cannot be sustained without swifter policy action.
“Expect faster special local government bond issuance or new policy financing tools to stabilise investment. But a budget revision looks less likely as this year’s growth target is both lower and more flexible. Softer credit growth and investment momentum could also force the PBoC to cut rates sooner than expected.”
ZHIWEI ZHANG, CHIEF ECONOMIST, PINPOINT ASSET MANAGEMENT, HONG KONG:
“The economic growth slowed in Q2, but I am not sure it would push the government to change policy stance significantly in the coming months. We need to keep in mind that the Q1 GDP growth was strong at 5%. This means the government is still on track to deliver growth in line with the official target set at 4.5%-5%. Moreover, the export boom just continues to beat expectations, and it will likely remain strong in the short term. The Politburo meeting in the last week of July will shed light on the policy makers’ guidance.”
BACKGROUND
* China’s economy is losing momentum after a stronger-than-expected start to the year, fuelling concerns that weak demand at home is leaving growth increasingly vulnerable to any downturn abroad.
* Recent data has pointed to a deepening imbalance in the world’s second-largest economy, with firm industrial output and export activity standing in stark contrast to weak consumer spending and private investment as a prolonged property downturn drags on confidence.
* Economists warn Beijing’s reliance on manufacturing and exports to compensate for weak household demand is becoming harder to sustain as global growth cools and external demand loses momentum beyond semiconductors.
* China has largely absorbed the latest oil shock thanks to large stockpiles, a broader energy base and state-controlled fuel prices, but a prolonged rise in energy costs could test that resilience.
* Persistently expensive oil could lift costs for factories, squeeze profit margins and reduce Beijing’s room to support growth if inflation rises without a stronger recovery in consumer demand.
* The uneven data underscores the challenge for policymakers to keep growth on track while correcting a deep supply-demand mismatch, with strong production increasingly out of step with weak spending at home.
* China’s economic growth is expected to slow to 4.6% in 2026 from 5.0% last year, before easing further to 4.4% in 2027, according to a Reuters poll.
(Reporting by Reuters Asia bureaus; Compiled and edited by Subhranshu Sahu)
