China’s economy is expected to decelerate in the Q2 as the impact of US tariffs intensifies
China’s economy is expected to have cooled in the second quarter following a strong start to the year, as demand is hampered by trade tensions and a protracted real estate slump, increasing pressure on policymakers to implement more stimulus to support growth.
A tenuous U.S.-China trade truce and policy assistance have helped the world’s second-largest economy avoid a severe slowdown thus far, but as exports slow, prices continue to decline, and consumer confidence is still low, markets are preparing for a tougher second half.
According to a Reuters survey, the gross domestic product (GDP) expanded 5.1% year-over-year in April–June, a slower pace than the 5.4% growth in the first quarter, according to data due Tuesday. The anticipated rate would still be higher than the 4.7% predicted in an April Reuters poll and is about consistent with the official full-year goal of 5%.
“While growth has been resilient year-to-date, we still expect it to soften in the second half of the year, due to the payback of front-loaded exports, ongoing negative deflationary feedback loop, and the impact of tariffs on direct exports to the U.S. and the global trade cycle,” Morgan Stanley analysts wrote in a research note.
“The third-quarter growth could slow to 4.5% or lower, while Q4 faces unfavourable base effect, putting the annual growth target at risk,” according to the analysts. Beijing is anticipated to present a supplemental budget of 0.5–1 trillion yuan ($69.7 billion–$139.5 billion) by the end of the third quarter.
In June, companies hurried out shipments to take advantage of a shaky tariff truce between Beijing and Washington in anticipation of an impending August deadline, which helped China’s exports regain some speed while imports recovered.
Tuesday at 0200 GMT is when GDP data is due. It is anticipated that independent data on June activity will reveal a slowdown in both retail and manufacturing output.
According to the poll, the economy is expected to have grown by 0.9% in the second quarter, as opposed to 1.2% in January through March.
The survey predicts that China’s GDP growth will slow to 4.6% in 2025, which is below the official target, from 5.0% in 2021 and then further slow to 4.2% in 2026.
Act on Balancing
At the next Politburo meeting, which is scheduled for late July, investors are eagerly awaiting any indications of further stimulus, which is expected to influence economic policy for the rest of the year.
According to a Reuters survey of analysts, the central bank’s key policy rate, the seven-day reverse repo rate, is expected to be lowered by 10 basis points in the fourth quarter, along with the benchmark lending prime rate (LPR).
Beijing has increased consumer subsidies and infrastructure expenditure in addition to maintaining monetary easing. In an effort to protect the economy from U.S. President Donald Trump’s trade tariffs, the central bank lowered interest rates and provided liquidity in May.
However, economists and observers of China argue that stimulus alone could not be sufficient to address long-standing deflationary concerns, since producer prices fell in June at their quickest rate in almost two years.
China is expected to speed up supply-side reforms in order to reduce excess industrial capacity and discover innovative methods of increasing domestic demand.
Chinese policymakers are faced with a difficult balancing act as they attempt to reduce output while preserving job stability in the face of a deteriorating labor market outlook, according to analysts.
