China is on the cusp of a major economic crash. The official urban unemployment rate has shot up to 5.2%. Through deficit spending, the government is pulling out more stops than ever to stimulate the economy. As analysts have cautioned, these measures may be insufficient to address the structural challenges holding back long-term growth.
The current economic landscape shows us an undeniable, perilous structural slowdown and no clear architecture to build a new, sustainable framework for broad-based economic growth. With institutional trust still at all-time lows, that has led to a climate of uncertainty for consumers and businesses alike. Consequently, all manufacturers feel little push to jumpstart new investment cycles, which would sharpen the scope for recovery.
China is definitely getting more disciplined about taking the long view. That means only about 1-1.5% of its GDP in fiscal stimulus to jumpstart its generally slow-growing economy. This approach will not lead to the results people are hoping for. Economic forecasts are now predicting a GDP growth rate of no more than 4.4%, reflecting a possible cooling down of the economy’s recovery trajectory.
The consumer price index (CPI) in China fell by 0.1% in April, while core inflation remains relatively low at 0.5% year-over-year. Additionally, the producer price index (PPI) for consumer goods has fallen 1.4%, reflecting softening demand. These are more alarming figures that show consumers are starting to really feel the pinch and getting close to their spending capacity.
Moreover, the negative shock on the real estate market has yet to be fully absorbed, especially in tier-one cities where property prices are still on a downward trajectory. This exacerbating trend is an additional danger to consumer confidence and spending. Migrant workers are caught in a harsh vise. They face the very real challenges of underemployment and wage compression, factors that drastically constrain their fiscal space.
The government has acted to promote fixed asset investment, a category that performed particularly well in the first quarter. Experts across the industry largely agree that this momentum cannot be sustained over time. Perhaps the biggest external pressure is the imminent U.S. tariffs on Chinese imports, now approaching 40%. This move makes harmful cuts to an already tenuous economy even more dangerous.