20260716-招银国际-China_Economy_Weak_2Q_growth_points_to_accommodative_policy_stance_in_2H_8页_923kb

China Economy Summary: 2Q26 Performance and Policy Outlook

Core Content Overview

China's economy showed signs of weakening in the second quarter of 2026, with real GDP growth slowing to 4.3% YoY, the lowest since 2022. This slowdown was accompanied by a shift in the GDP deflator, which turned positive at 1.5% after 12 consecutive quarters of deflation. Despite some rebounds in specific sectors, the overall growth structure remains K-shaped, indicating uneven performance across different parts of the economy.

Main Views and Key Information

1. Economic Growth and Deflation

• Real GDP Growth: Slowed to 4.3% YoY in 2Q26 from 5.0% in 1Q26, missing market expectations.
• Sequential Growth: Slowed to 0.9% QoQ from 1.3%, showing a broad-based moderation.
• GDP Deflator: Rose to 1.5% in 2Q26, ending 12 quarters of deflation, but consumer demand remained weak.
• Future Outlook: GDP growth is expected to moderate to 4.6% in 2026, with a range of 4.4–4.7%, due to demand payback and weak household income.

2. Property Market Trends

• Property Sales: Continued to weaken, with GFA sold falling 11.6% YTD in June.
• Tier-1 Cities: Showed a notable rebound in YoY sales at 29.7%, driven by the wealth effect from AI growth.
• Lower-Tier Cities: Experienced larger declines, with tier-2 and tier-3 cities seeing sales drop by -14.4% and -21.6% respectively.
• Second-Hand Sales: Remained resilient, rising 10.5% YoY in the first half of July, but existing-home prices fell 0.3% MoM.
• Policy Expectations: Further support is anticipated in 2H26 for property stabilization, liquidity management, and housing price control.

3. Consumption Trends

• Retail Sales: Grew 1.0% YoY in June, but average 2Q growth was only 0.2%, much lower than 1Q's 2.4%.
• Consumer Confidence: Dropped to 89.5 in June, indicating a lack of optimism.
• Savings and Income: Real per-capita income rose 4.2% YoY, but real consumption expenditure only grew by 2.7%.
• Consumption Drivers: Expected to remain muted without sustained household income support, job creation in the service sector, and credible property stabilization.

4. Investment and Industrial Output

• Urban Fixed Asset Investment (FAI): Contracted sharply, with a YoY decline of -5.7% in June.
• Sectoral Performance: Manufacturing, infrastructure, and property investment all declined.
• Industrial Output: Regained momentum, with value-added industrial output rising 5.3% YoY in June, led by export-facing manufacturing.
• Export Delivery Value: Rose to 14.8% YoY, showing that external demand remains a key anchor.
• Sectoral Divergence: AI, equipment, and export-linked sectors outperformed, while property and traditional industries lagged.

5. Policy Outlook

• Accommodative Policies: Expected to increase in 2H26 following the weak 2Q growth, with a focus on targeted support.
• Supply-Side Priorities: Emphasis on AI development, technological self-reliance, and global tech competitiveness.
• Demand-Side Measures: Moderate support through property stabilization, faster infrastructure execution, and income enhancement.
• Policy Limitations: The 15th Five-Year Plan's consumption plan suggests limited scope for broad-based demand-side stimulus.

Key Figures and Indicators

• GDP Growth: 4.3% in 2Q26, down from 5.0% in 1Q26.
• GDP Deflator: 1.5% in 2Q26, up from -0.1% in May.
• Industrial Output (VAIO): 5.3% YoY in June, down from 6.1% in 1Q26.
• Export Delivery Value: 14.8% YoY in June, up from 11.3% in 1Q26.
• Retail Sales: 0.2% YoY in 2Q26, with notable drops in home appliances, furniture, and autos.
• Property Sales: GFA sold fell 11.6% YTD in June, with tier-1 cities showing a rebound.

Conclusion

China's economic performance in 2Q26 was weaker than expected, with growth slowing and deflation pressures easing. The K-shaped growth pattern highlights uneven sectoral performance, with AI and export-linked sectors showing strength while consumption and property markets remain weak. Policymakers are likely to adopt a targeted approach to support growth in 2H26, focusing on supply-side initiatives and moderate demand-side measures. The 2026 GDP growth is expected to moderate to 4.6%, with continued challenges from weak household income, local fiscal stress, and global demand trends.