China’s increasing efficiency in manufacturing is likely having a negative impact on the labor market. VCG
Goldman Sachs said economic data for August suggested China’s policy actions were not quick enough.
Strategists pointed to weak retail sales and potential pressure on the labor market.
They revised down their 2024 GDP growth forecast to 4.7% from 4.9%.
China’s economy shows no signs of recovery, and Beijing’s policy interventions have not been very effective.
Goldman Sachs analysts lowered their forecast for China’s GDP growth to 4.7% from 4.9%, well below the country’s target of around 5% this year.
Weak economic data last month could lead to a further decline in retail sales and pressure on the labor market, strategists said, signaling that China’s economic policies were ill-timed.
“Although macro policies have started to ease, the move has been too slow and reluctant. As a result, confidence remains sluggish and the Chinese economy faces more challenges than it did a few months ago,” the analysts said in a note on Sunday.
Analysts said China’s slow and incremental monetary, fiscal and housing policies over the past year had created a cycle that promises further weakness to come.
In particular, they point to China’s efficiency drive in manufacturing, which is driving strong exports but is likely to have a negative impact on the labor market as the number of jobs created by GDP output is on the decline.
“For both structural and cyclical policies, the speed of implementation is as important as the policy direction. A rapid push into high-tech manufacturing and automation without stronger unemployment support could lead to pressures on the labor market,” the analysts explained.
If the labor market continues to weaken, China’s already weak domestic demand could be hit further, experts said.
Another negative feedback loop is rising real interest rates in China, which weighs on demand and price increases, lowering inflation expectations and pushing real interest rates even higher, creating a cycle of rising interest rates, analysts say.
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China’s failure to address the fiscal crisis for local governments is also posing a potential headwind. Amid a tough property market and the continued fallout from earlier spending to combat the coronavirus, local governments are facing cash pressures and are implementing tightening policies to make ends meet. These policies will further dampen demand and reduce revenues, analysts said.
“The longer policy hesitates, and the more frequently policy implementation disappoints, the more pessimistic households, businesses and investors will become,” the analysts said.
Meanwhile, falling home prices are driving home buyers out of the market, further depressing prices. The housing downturn is also having a ripple effect on steel and cement production, which fell year-over-year in August and contributed to an overall decline in retail sales, strategists say.
“Due to this negative feedback loop, the longer central governments wait, the greater the costs they may ultimately have to absorb to shore up demand and confidence,” the researchers said.
Analysts have joined a growing chorus of caution about China’s economic growth in recent weeks. Last week, economist Wang Yingrui said China would likely miss its growth targets by the end of the year, citing slowing industrial production and continuing weakness in consumer sentiment.
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