Recently, China’s economic growth data was released, which showed a GDP expansion of 5.3% in the first quarter, much more than what the main organizations and analysts expected. At first glance, it might seem that the Asian giant’s economy is going from strength to strength, but they have an elephant in the room: the real estate sector. A stick in the wheel that leads the country to disinflation due to the fall in consumption and that predicts a CPI for this year of 0.6%, according to macroeconomic analysts, from a prediction in March of 0.8%.
The housing crisis is causing lasting weakness in household spending. “The real estate sector and its upstream and downstream sectors are contracting across the board, steadily lowering social expectations as well as overall demand,” said Nie Wen, chief macroeconomic analyst at Hwabao Trust. “Government investment is urgently needed to stabilize or boost demand,” the expert told Bloomberg Economics.
A group of experts from Nomura Global Market say that it is “unlikely” that the Chinese economy will bottom out “as long as its real estate sector continues to decline.” They explain that “all economies suffer severely when real estate bubbles burst, unless a miracle occurs, and China is no exception.”
A survey of expert economists by Bloomberg Economics concludes that the real estate crisis poses “the biggest risk” to China’s growth this year. Specific nine of the 15 respondents They have assured this. While the rest said low inflation and weak consumption are the biggest concerns. The measures that Beijing should take to correct this also generated schism. On the one hand, some believe that they should boost real estate investment, while the second opinion is to accelerate public spending.
Be that as it may, Beijing has set an ambitious growth target of 5% for this year in the famous Two Sessions, while economists and expert analysts improved their growth forecasts only from 4.6% to 4.8%. However, the IMF projected growth of 4.6% for this year, the same as in its January review. Although the entity’s economic advisor, Olivier Gourinchas, assured at a press conference in Washington that they will review their GDP forecasts for the Asian giant due to the good performance of its economy in the first quarter.
Still, Gourinchas reiterated that weakness in China’s real estate sector “will likely persist” and encouraged the country’s authorities to pursue measures that directly address some of the root causes, including recapitalizing or liquidating developers who are struggling financially. .
In general terms, the growth in consumption after the post-pandemic opening in 2023 “was well below market expectations and people have been much more conscious of their spending,” they say from Nomura.
The retail sales grew only 5.8% year-on-year that year after having suffered a contraction of 0.5% in 2022 due to Covid Zero. “In 2024 we expect a much smaller contribution to growth from consumers,” they say.
Among the reasons they give to argue this statement is the existence of “a much larger base” since the pandemic in China ended in mid-2023. “In fact, retail sales growth fell sharply in March compared to January and February”.
On the other hand, they emphasize that household income growth “has been well below pre-pandemic levels,” which suggests obstacles to consumption.
This is coupled with a disproportionate drop in housing prices. In the country’s 70 main cities they fell 10.7% from their highs in 2021 according to the National Statistics Office. But the China Real Estate Information Corporation estimated a 33% drop in non-luxury housing prices in major cities from their peak in mid-2021.
Also the drop in stock market prices of 2.3% since the beginning of 2023, causing a drop in wealth, could also affect consumption.
At the same time, these problems with the real estate sector are also forcing local governments to cut the compensation of their employees.
Unemployment is another of the obstacles that is causing internal demand to be completely reduced.
In the IMF’s economic report for the month of April, they assure that the lack of real policies for the damaged real estate sector “could produce a greater and more prolonged fall in investment in the sector”, accompanied by an even more pronounced drop in housing prices, demand and further weakening of trust and household spending. This added to job uncertainty among younger people, who are increasingly having difficulty finding employment.
No matter how much green shoots are seen in the Chinese economy, if policies are not applied to solve the real estate crisis, growth and consumption will continue to be hampered.
