That was well below the 4.8% increase in the previous quarter and well below the 1% growth forecast by economists in a Reuters poll. On a quarterly basis, GDP shrank by 2.6%.
In the first half of this year, the economy grew by 2.5%, well below the government’s annual target of 5.5%. Beijing admitted on Friday that it would be difficult to meet its GDP targets this year.
“There are challenges to meet our projected economic growth target for the full year,” Fu Linghui, a spokesman for the NBS, said at a news conference in Beijing. But he expected the economy to recover in the second half.
In Friday’s press conference, Fu said the economy has taken an “unexpected, severe” blow from domestic and external factors.
The poor performance in the second quarter “reflected the significant shocks from the Omicron outbreak and associated severe measures being taken in major cities,” said Chaoping Zhu, the Shanghai-based global market strategist for JP Morgan Asset Management.
But the real estate sector may still pose a downside risk to growth, Zhu said.
Larry Hu, China’s chief economist for Macquarie Group, said the latest data imply that GDP growth will need to accelerate to more than 7% in the second half to deliver a 5% annual growth rate for the full year.
“It is impossible without a significant escalation of policy incentives from current levels,” he said.
Real estate slump drags
There was a bright spot in Friday’s economic data.
But the huge real estate sector remains a major hindrance.
Real estate investment fell 9.4% in June from a year ago, after falling 7.8% in May, according to Macquarie Capital’s calculations based on government data. Property sales by floor space fell 18% last month, after falling 32% in May.
“The declining sales mean developers are dealing with a liquidity crisis,” Hu said.
“The real estate problem is causing increasing social instability, as evidenced by the recent mortgage boycott,” he added.
In recent days, desperate homebuyers in dozens of cities have refused to pay mortgages on unfinished homes. The payment boycott comes as a growing number of projects have been delayed or stalled due to a cash shortage that left giant developer Evergrande unable to pay its debts last year and several other companies seek protection from creditors.
Zhu of JP Morgan Asset Management said the increasing number of unfinished homes poses a major risk to the financial health of banks.
“Decisive and effective regulatory action must be taken to prevent the mortgage boycott from developing into a systemic risk,” he said.