China expected to post its slowest growth in 27 years

The manufacturing sector and tariffs are expected to drag down real GDP growth to 6.3% in 2019.

China’s real GDP growth forecast in 2019 is revised down to 6.3% from 6.5% previously, its slowest in 27 years, according to a report by Fitch Solutions.

It is still slightly higher than the Bloomberg consensus of 6.2%, with Fitch Solutions banking on Beijing to increase stimulus and prop up the investments and exports to combat China’s weaknesses on private investment and tariffs.

Real GDP fell to 6.2% YoY in Q2 from 6.4% Yoy in Q1, dragged down by the manufacturing sector, whose growth declined to 5.8% YoY in Q2 from 6.1% YoY in Q1. Primary industries growth improved from 2.7% to 3.0%; whilst tertiary services growth remained steady at 7.0% YoY, propelling the report’s views that the non-manufacturing sector will be the key driver of China’s growth.

Along with these numbers, Fitch Solutions expects Beijing to increase its stimuli and support the economy, with four key expectations. First, the report expects China to increase investment spending to make up for weakness in the private sector, which should help stabilise fixed asset investment growth in H2.

Fitch Solutions also said that China will likely announce more cuts to export tariffs and other fees associated with exporting goods to support the sector. Premier Li Keqiang said on July 10 that the government will roll out more export tax rebates and cut insurance fees for exporters, which according to the report will defray the likely discounts the government will otherwise have to provide to maintain export volume to the US.

The report also noted the likelihood of the Chinese government announcing measures to boost demand locally, and in particular, encourage the spending of disposable incomes of rural and urban residents. These will maintain the otherwise unsustainable recovery of retail sales, which accelerated to 9.8% YoY in June from 8.6% in May and 7.2% in April.

Finally, China reportedly has strong motivation to boost growth to show that the Chinese economy is stable. Accordingly, this will prevent Washington from taking a tougher line in trade negotiations as well as fortify China’s social stability and reduce the risk of unrest in the mainland.