POLL – China’s economic growth to be cut by more than half in second quarter, more political support seen

The world’s second-largest economy has been recovering since the second quarter of last year, supported by strong foreign demand for its exports, but growth is faltering as manufacturing activity slows due to rising raw material costs and supply shortages, while small outbreaks of COVID-19 have also limited consumer demand.

“We maintain our view that the downward pressure on growth is likely to increase in the second half of the year,” Nomura analysts said in a note, expecting pent-up demand to subside and export growth to subside. weakens as developed economies reopen. They also warned that soaring commodity prices would suppress consumption.

The People’s Bank of China decision on Friday to cut the amount of liquidity banks must hold as reserves, even as the central bank sought to normalize its policy to contain financial risks, fueled concerns about an economic slowdown.

But Tuesday’s data showing Chinese exports grew at a much faster rate than expected in June offered some breathing space.

Barclays analysts have estimated the two-year average growth rate for the first half of this year to be 5.0-5.5%, well below pre-COVID-19 levels of 6.0-6 , 5% in 2019.

China’s statistics bureau said the two-year average growth rate in the first quarter was 5.0%.

On a quarterly basis, growth is expected to accelerate to 1.2% in April-June from 0.6% in the first quarter, according to the survey.

Survey economists expected the economy to grow 8.6% this year, the highest annual growth in a decade, following a 2.3% expansion in 2020. The latest poll result stood. unchanged from April forecast.

China has set an annual economic growth target of over 6% this year, below analysts’ expectations, giving policymakers more leeway to deal with uncertainties. Growth is then expected to slow to 5.5% in 2022, according to the survey.

MORE POLITICAL SUPPORT EXPECTED

With the economic recovery showing signs of slowing and still uneven, analysts expect policymakers to put further measures in place to support activity later this year.

China’s central bank said on Friday it would cut banks’ reserve requirement ratio (RRR) for the first time since April 2020 to support its faltering post-COVID economic recovery.

The cut in RRR – the amount of cash banks are required to hold as reserves – will come into effect on Thursday, when the statistics bureau is due to release second-quarter GDP data, as well as June factory output, retail sales. and capital investments. .

According to the poll, the PBOC is expected to reduce the RRR by another 50 basis points in the fourth quarter, as pressure on the economy persists while consumer inflation declines.

Analysts expect China to keep its one-year prime lending rate at 3.85% until the end of 2021. The LPR has remained unchanged since May 2020.

“Further RRR cuts are still possible, but fiscal policy is more important as we need to accelerate spending and ensure the completion of the annual quota of special bonds,” said Wang Jun, chief economist of Zhongyuan Bank based. in Beijing.

Data from the Ministry of Finance showed that local governments issued a net 584 billion yuan ($ 90.34 billion) in special bonds in January-May, accounting for 16% of the annual quota of 3.65 trillion yuan. Special bonds are mainly used to finance infrastructure projects.

The poll also did not predict any change in the benchmark deposit rate until the end of 2021. The PBOC has kept it at 1.5% since October 2015.

Consumer inflation will likely slow to 1.5% in 2021 from 2.5% in 2020, but it could rise to 2.3% in 2022, according to the poll.

(For other articles in Reuters Long-Term Global Economic Outlook Poll Package) ($ 1 = 6.4647 Chinese yuan)

(Poll by Shaloo Shrivastava in Bengaluru and Jing Wang in Shanghai; Reporting by Kevin Yao; Editing by Ana Nicolaci da Costa) ((kevin.yao@thomsonreuters.com; +8610 5669 2128;))