China can't boost its economy because its macro policy is 'too slow and reluctant,' Goldman Sachs says
VCG
- August economic data shows China's policy moves haven't acted quickly enough, Goldman Sachs says.
- The strategists pointed to weak retail sales and potential labor market pressures.
- They downgraded their 2024 GDP growth forecast from 4.9% to 4.7%.
China's economy can't seem to catch a break, and Beijing's policy interventions haven't done much to help.
Analysts at Goldman Sachs downgraded their forecast for China's GDP growth from 4.9% to 4.7% — notably lower than the country's target of "around 5%" for the year.
The strategists pointed to weak economic data from last month, with further contracting retail sales and potential labor market pressures. These data points show China's economic policies have been ill-timed, the strategists say.
"Although macro policies have started to ease, they are too slow and reluctant. As a result, the Chinese economy faces more challenges today than even just a few months ago as confidence continues to erode," the analysts said in a Sunday note.
China's slow and incremental monetary, fiscal, and housing policies from the past year have created cycles that promise further weakening ahead, the analysts said.
They pointed in particular to China's efficiency pushes in manufacturing, which are driving strong exports but likely hurting the labor market as the number of jobs created by GDP output trends down.
"For both structural and cyclical policies, the speed of implementation matters as much as the direction of these policies. Pushing high-tech manufacturing and automation too quickly without strengthening unemployment support may lead to labor market pressures," the analysts explained.
If the labor market continues to cool, it could further hurt China's already-slow domestic demand, they said.
Other negative feedback loops include China's elevated real interest rates, which weigh on demand and price inflation, thus lowering inflation expectations and further increasing real interest rates. That creates a cycle of increased rates, the analysts say.
China's failure to respond to local governments' financial crises is also stirring up potential headwinds. Local governments, faced with financing pressures amid a tough property market and continued fallout from earlier spending on Covid-control measures, are implementing tightening policies to make ends meet. Those policies further depress demand and reduce revenue, the analysts said.
"The longer policies stay hesitant and the more often policy implementation disappoints, the more pessimistic households, businesses and investors become," the analysts said.
Falling home prices, meanwhile, are keeping homebuyers out of the market and pushing prices down further. The sluggish housing market is also having spillover effects on steel and cement production, which saw year-over-year declines in August and helped drive down overall retail sales, the strategists say.
"Because of these negative feedback loops, the longer the central government waits, the higher the cost it may eventually have to absorb to shore up demand and confidence," they said.
The analysts add to a growing chorus sounding the alarm on China's growth in recent weeks. Last week, economist Yingrui Wang said China most likely won't reach its growth targets by year-end, pointing to a slowdown in industrial production and continued weak consumer sentiment.