At least nine US and international banks raised their forecasts for China’s economic growth this year following better-than-expected data from the second quarter, though they expect the momentum to fade in the coming months.
Banks including Morgan Stanley, Goldman Sachs Group and Barclays upgraded their estimates for full-year gross domestic product expansion closer to 5%, while the Australia & New Zealand Banking Group now sees 5.1% growth for 2025.
Official data released Tuesday showed the economy has held up surprisingly well in the face of US tariffs, thanks to resilient exports as well as policy support for consumption and investment.
But economists warned that growth will likely slow down due to an anticipated pullback in overseas shipments as well as sluggish consumer sentiment at home.
In addition, worsening deflation has pushed nominal GDP growth — which accounts for price changes — to just 3.9% in the second quarter, the slowest outside the pandemic since the quarterly data began in 1993. Authorities now have a rare window to tackle falling prices before the economy loses steam, even though finding a solution won’t be easy.
See also: China’s GDP seen outpacing target, easing stimulus pressure
“Deflation, the key macro challenge, persists,” Morgan Stanley economists including Robin Xing wrote in a report distributed Wednesday.
While policymakers’ recent signals to curb price wars was a “step in the right direction”, the campaign will unlikely be as effective as the supply-side reform in 2015 due to broader overcapacity, limited fiscal space for demand stimulus and a weaker macro backdrop, Xing and his colleagues said.
They warned that GDP growth will slip to below 4.5% in the second half of the year due to the payback effect from front-loaded export orders as well as the weakening impact of fiscal stimulus. Policymakers may launch a modest increase in fiscal stimulus between 500 billion yuan ($89.56 billion) to 1 trillion yuan, according to their forecast.
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ANZ economists including Raymond Yeung expect the drop in net export in the second half to shave 0.5 percentage point off growth, calling it the biggest challenge to growth for the period.
The analysts see a low chance for mid-year fiscal budget revision, noting in a Tuesday report that over 75% of the 10 trillion yuan budget deficit has yet to be allocated as of the end of May. They forecast a 20 basis point interest rate cut in the rest of the year.
Goldman Sachs economists said policymakers are not in a rush to launch broad or significant stimulus in the short term given the solid economic growth so far this year.
“We expect incremental, targeted easing to help stem the property downturn and mitigate labour market pressures,” they said in a Tuesday note.
Chart: Bloomberg
