China’s economy posted its second straight quarterly slowdown after real GDP growth decelerated to 7.5% (y-o-y) in the three months to June, down from 7.7% reported in Q1. Moreover, the latest reading marks the fifth straight month that growth has come in at below 8.0%. The disappointing Q2 GDP report came on the heels of the latest batch of soft data releases which also highlighted weakening economic activity. For instance, latest industrial production data came in below expectations as output rose by just 8.9% (y-o-y) in June, moderating from May’s 9.2% increase. And in other parts of the economy, softness was evident in fixed asset investment, as the year to date figure eased to 20.1% (y-o-y) in June, down from 20.4% in the five months to May. On a more positive note, monthly data for nominal retail sales fared better in June, rising by 13.3% (y-o-y) compared to 12.9% in May. While overall economic activity is clearly trending lower, inflationary pressures have started to pick up recently, with June’s figure coming in at 2.7% (y-o-y), compared to 2.1% a month earlier. However, for the first half of 2013, inflation averaged 2.4%, which is still well below the official full-year target of 3.5%.
Beijing is willing to tolerate lower growth as part of its efforts to shift the economy from investment toward consumption, but with activity slowing sharply, investors are now questioning how low will the country’s new leaders allow growth to drop before taking action. Besides slowing domestic activity, June’s trade report shows that the country is facing difficulties on the external front. Exports fell by 3.1% (y-o-y), the first contraction in 17 months, while imports slipped by 0.7%.
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