China posts slowest quarterly GDP growth since 2022 as investment slumps

China’s economy in the second quarter expanded at its weakest pace since the fourth quarter of 2022, reinforcing calls for policy stimulus as an accelerating slide in investments deepened the strain on growth, while consumption stayed subdued.

Gross domestic product growth came in at 4.3% in the April to June period, data from the National Statistics Bureau showed Wednesday, missing economists’ forecast for 4.5% growth in a Reuters poll, and slowing from 5% in the first quarter.

That second-quarter growth came below Beijing’s full-year growth target range of 4.5% to 5%, the least ambitious goal in decades, amid tensions with trade partners, including the U.S. and the European Union, and sluggish domestic demand.

Given the disappointing growth, Tianchen Xu, senior economist at Economist Intelligence Unit, expects stimulus measures to be ramped up in the third quarter, including a policy rate cut to stimulate investment demand.

Urban fixed-asset investment, including real estate development and infrastructure projects, declined 5.7% in the first six months from a year earlier, worse than expectations for a 4.9% drop in a Reuters poll.

Xu attributed the steepening investment slump to local governments channeling resources into debt restructuring and a shortage of eligible projects in the pipeline. “Boosting infrastructure investment will be a key focus for stabilizing growth.”

Beijing’s campaign to rein in excess capacity and end bruising price wars will also weigh on private investment in the near term, said Sarah Tan, economist at Moody’s Analytics.

The investment in real estate, infrastructure and manufacturing plunged 18%, 2.4% and 1.2%, respectively, according to the official data.

In June, China’s retail sales grew 1%, rebounding from a 0.6% drop in the prior month and exceeding economists’ forecast for a 0.1% fall. Retail sales in May posted their first monthly decline since late 2022, dragged down by tepid demand and merchants’ steep discounting.

Industrial output expanded 5.3% in June from a year ago, stronger than the forecast 4.7% growth, and gaining pace from 4.5% expansion in May.

Chinese economy has grappled with a deepening supply-demand imbalance. Robust industrial production and exports tied to the global AI investment boom continue to power headline growth, even as consumption and private investment weakens amid a prolonged property downturn and volatile energy prices.

The statistics bureau noted “acute” imbalance between excess supply and sluggish demand, urging policymakers to step up “counter- and cross-cyclical adjustments.”

Urban investment slumped for the first time in decades last year, falling 3.8% from a year earlier, and steepened from a 4.1% contraction in the first five months, as a prolonged property downturn and tighter constraints on local governments’ borrowing hampered one of China’s traditional growth drivers.

The intensity of pullback in investment has been “unprecedented,” said Li Daokui, a professor of economics at Tsinghua University. Speaking at a macroeconomics seminar earlier this week, the former China central bank advisor called for a substantial expansion in government borrowing to more than double this year’s planned 12 trillion yuan ($1.7 trillion) in new debt issuance.

Economists are divided over whether the slowdown will force Beijing’s hand on stimulus.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said the weaker headline growth is unlikely to prompt a meaningful policy shift in the coming months, with a strong first quarter and resilient exports keeping the annual target within reach.

Better-than-expected retail sales and industrial output would give policymakers “more wiggle room” on near-term stimulus, said David Chao, global market strategist at Invesco.

Exports remain the bright spot in an otherwise cooling economy, as the global AI buildout helps offset the headwinds from Middle East conflict.

China’s export growth beat expectations in June, clocking the strongest rise since late 2021, powered by demand for chips, computers and parts, and power equipment.

Surging tech-related imports also point to a deepening AI infrastructure cycle at home, said Chao, with autos and consumer goods adding momentum.

The export strength, however, is straining ties with trade partners. China’s surplus with the European Union widened 24% in the first half, according to Larry Hu, chief China economist at Macquarie, driven by machinery and vehicle shipments.

“Despite a three-month trade truce, the growing surplus keeps the risk of a China–EU trade conflict elevated,” Hu said.

Reflecting the two-speed growth in labor market, workers at companies with overseas revenue were more upbeat about their job prospects than those at domestically focused firms, according to Morgan Stanley.

Pay cuts remained households’ top concern, the bank estimates, lowering income growth over the next 12 months to about 5% from its previous forecast of 5.8%.

Chinese urban unemployment rate, which excludes those who leave cities for rural areas, remained steady at 5% in June. The leadership is targeting an unemployment rate of less than 5.5% over the next five-year period.

A separate survey conducted by Li’s team, that counted people who have been jobless for the past two years and are no longer covered in the official labor force survey, showed China’s broad unemployment rate at a much-higher 10.2%. More than half of the roughly 24 million long-term unemployed are aged 16 to 24.

Youth joblessness has been a particular sore point for official statistics. Beijing had discontinued the youth unemployment rate in 2023 after it surged to a record 21.3%, before reinstating it months later under a new methodology and at a lower rate.

The youth unemployment rate fell to 15.6% in May, the lowest level in nearly a year.