How to view the 4.7% GDP growth rate?

With the convening of the Third Plenary Session, the economic data released today carries significant implications, possibly serving as an important indicator of the direction set by the conference. Overall, the GDP growth rate in the second quarter was 4.7%, slightly lower than the first quarter, aligning perfectly with the 5% growth target for the first half of the year. Considering the relatively low base from last year, this may indicate that the overall tone of the conference will be "deliberating for the long term". Structurally, the situation of strong supply and weak demand has further intensified. We have reason to predict that supply-side policies related to technology, industry, and others will continue to take the lead, while demand-side policies may need to balance the current situation with long-term considerations, proceeding cautiously, such as the previously discussed reform of consumption tax.

How to evaluate the 4.7% economic growth in the second quarter?

If benchmarked against the government work report, the task progress has been achieved. The actual GDP growth in the first half of the year was 5.0%, precisely meeting the annual target growth rate of "around 5%"; the unemployment rate was 5.0%, below the target level of "around 5.5%".

If evaluated based on the data itself, there are three important features of the second-quarter economy:

First, weaker than Q1 on a quarter-on-quarter basis. Looking at the year-on-year growth rate of actual GDP, based on a low base, the 4.7% growth in the second quarter is still slightly lower than the 5.3% in the first quarter. In terms of the seasonally adjusted quarter-on-quarter annualized rate of GDP, it dropped from 6.1% in the first quarter to 2.8% in the second quarter this year.

Second, nominal growth is weaker than real growth. The nominal GDP growth rate in the second quarter was 4.0%, marking the fifth consecutive quarter since last year's second quarter that it has been lower than the actual GDP growth rate. Weak demand, strong supply, and the situation of trading price for quantity continue. Correspondingly, the industrial capacity utilization rate after seasonal adjustment in the second quarter was 74.9%, still at a low level in recent years.

Third, domestic demand is weaker than external demand. In the second quarter, USD exports increased by 5.9% year-on-year, while in comparison, social retail sales and fixed asset investment grew by 2.7% and 3.6% year-on-year, respectively, both lower than the export growth rate. Since the second half of last year, the Caixin PMI for manufacturing has gradually surpassed the official PMI, reflecting the pattern of stronger external demand than domestic demand.

Therefore, considering these three dimensions, the second-quarter economy has successfully achieved the target progress set at the beginning of the year, while also showing some shortcomings in terms of marginal momentum, inflation, and domestic demand.

How does 4.7% leave room for policy adjustments?

To ensure that the annual economic growth rate is above 5%, the seasonally adjusted quarter-on-quarter GDP growth in the second half of the year cannot be lower than 1.4%. Assuming that the quarter-on-quarter GDP growth rates in the third and fourth quarters are both 1.4%, the corresponding year-on-year growth rates will be 4.9% and 5.0%, respectively, resulting in an annual economic growth rate of exactly 5.0%.

Considering that the seasonally adjusted quarter-on-quarter GDP growth in the second quarter was only 0.7%, there may be room for policy stimulus in the second half of the year to boost economic, especially domestic demand growth momentum The probability of accelerating the use of existing policies is higher than introducing large-scale new policies. Currently, various macro policies are generally in two states. One is that the existing space has not been fully released. Taking fiscal policy as an example, the progress of local special bond issuance in the first half of the year is less than 40% of the annual quota, so the focus should be on how to make good use of the existing quota. The other is that the incremental space is constrained by internal and external factors. Taking monetary policy as an example, the central bank currently needs to consider factors such as stabilizing the exchange rate and interest rate differentials. Lowering policy interest rates needs to wait for the Fed to cut interest rates and for exchange rate and interest rate differential pressures to ease.

In addition, the balance of power in the European Parliament and the U.S. presidential election has begun to tilt recently. Considering the increasing uncertainty and severity of the external situation, macro policies also need to leave room for uncertainty in the next stage.

Specific sub-item data for June:

Industrial Sector: Is production momentum weakening? In June 2024, the year-on-year growth rate of industrial value added was 5.3% (5.6% in May), seemingly signaling a slowdown in production once again. Under the call for "new quality productivity," the overall situation of industrial production is greatly influenced by high-tech industries. The year-on-year growth rate of high-tech industry employment decreased from 10% in May to 8.8% in June, leaving a "trace" of cooling in industrial production, including the weakening pull of high-tech industries such as electronic equipment and automobiles on employment growth.

Two major "obstacles" to accelerating industrial production. On the one hand, capacity clearance remains the "focus" of the entire field—although capacity utilization has rebounded in the second quarter, it is still lower than the average capacity utilization rate of the past four years. The rebound in capacity utilization indicates that progress has been made in clearing industrial capacity, but the overall low capacity utilization rate indicates that the problem of strong supply and weak demand in the industry is still fermenting, which may to some extent suppress the production momentum of manufacturers (including the further decline in the PMI production index in June is another proof). On the other hand, the number of working days seems like a "small spark," but in reality, it "can start a prairie fire"—changes in the growth rate of industrial value added are often influenced by the number of working days. The number of working days in May is the same as in 2023, while the number of working days in June is two days fewer than in 2023, leading to a slight lack of momentum in industrial production in June.

Infrastructure: Rather than the overall growth rate of general infrastructure investment, it is more about the "contrary" growth rates of general and narrow infrastructure investment. In June, the year-on-year growth rate of general infrastructure investment was 10.2% (3.8% in May), successfully reversing the continuous decline in infrastructure investment growth since the beginning of the year. Looking at the detailed data of infrastructure investment, the upward trend in the growth rate of general infrastructure investment in June is more driven by the public utilities sector. This also explains the "contrary" growth rates of general and narrow infrastructure investment in June—excluding the public utilities sector, the narrow infrastructure investment growth rate in June was only 4.6% (4.9% in May), continuing the downward trend The "up" of broad infrastructure indicates that the focus of current infrastructure investment is on electricity, heat, and water supply led by central investment, but the "down" of narrow infrastructure indicates that the internal dynamic of infrastructure investment is still weak.

Infrastructure not only "goes with the wind", but also "goes against the wind". "With the wind" factors include the issuance of ultra-long-term special national bonds; "against the wind" factors include the approval of fixed investment projects by the National Development and Reform Commission being lower than the same period in previous years, adverse weather conditions affecting construction in many parts of China in early summer, although the issuance of special bonds has entered an accelerated channel, the overall scale is still lower than the same period in previous years, and the net financing scale of local government bonds continues to decrease. Looking at the recent performance of the infrastructure production side, it may be that the "headwind" is blowing stronger — for example, the asphalt starting rate is far behind historical levels, and the excavator starting hours are also at historically low levels. Looking ahead, the momentum of infrastructure recovery mainly comes from the expenditure intensity of local finances.

Real Estate: Will the weak investment continue, and can the improvement in transactions be sustained? Various data on real estate investment in June continued to show weakness, with real estate investment down by 10.1% year-on-year in the month, and there was no significant improvement in the decline in starting, construction, and completion areas compared to May.

The possibility of improvement lies in the fact that after the policy on May 17th, residents' transaction willingness was reflected in June. The decline in sales area in June narrowed, and in terms of funding, residents' prepayments and mortgage loans accounted for a larger proportion of other funding sources compared to May, showing an upward trend. In fact, the impact of the May 17th policy on second-hand housing is better than on new housing, and the year-on-year growth rate of second-hand housing transactions in June has turned positive, as second-hand housing prices have fallen more, making them more attractive to residents after the stability policy was introduced. In July, both new and second-hand housing transaction areas have declined to varying degrees, and the sustainability of the stability policy in the real estate sector remains to be observed.

Manufacturing: An important support for investment. In the trend of weak real estate and slowing infrastructure, manufacturing investment plays an "important role" in supporting investment. In June, manufacturing investment increased by 9.3% year-on-year, leading other sub-items. The sub-industries with accelerated growth in manufacturing investment are concentrated in the midstream and upstream industries, including textiles, chemical raw materials, and non-ferrous processing, but some downstream industries with a stronger "technological sense" have seen a marginal slowdown in growth, such as transportation equipment, electrical equipment, and computers. The low capacity utilization rate in downstream industries may inhibit their willingness to expand production Consumption: Above-quota social retail turns negative, consumption trend fluctuates. In June, social retail grew by 2.0% year-on-year, slightly lower than expected, mainly facing two "headwinds": first, this year's "618" shopping festival shifted to May, with total online retail sales lower than the same period last year; second, residents continue to wait and see for price promotions on cars, leading to a widening decline in car retail sales by 6.2% year-on-year in June, which is also one of the reasons for the negative turn in above-quota social retail in June.

Confidence and price recovery are the highlights of consumption in the second half of the year. Consumer sentiment continued to improve at the end of the second quarter, performing better year-on-year than in 2023 but still with room for recovery compared to the same period in 2019; meanwhile, the moderate rise in inflation is also conducive to supporting future nominal social retail growth.

Authors: Zhao Honghe, Zhang Xinnan, Tao Chuan; Source: Chuan Yue Global Macro; Original Title: "4.7% Policy Blank Space (People's Livelihood Macro Zhao Honghe, Tao Chuan)"