Morgan Stanley Downgrades China 2024 GDP Forecast to 4.6% on Weak June Data

Morgan Stanley has lowered its full-year GDP forecast for China, citing weaker-than-expected economic activity in June that fell short of both consensus estimates and Beijing's official targets. The investment bank now projects the world's second-largest economy will grow by 4.6%, a downward revision of 20 basis points.

Drivers of the Downgrade

The revision follows June activity growth of 4.3%. According to a note from Morgan Stanley's economics team, the slowdown was driven by several key factors:

• Slower infrastructure development after significant front-loading of projects in the first quarter.
• Reduced industrial output in refining and petrochemicals, linked to oil price movements.
• Weaker consumer spending as the effects of trade-in programs fade, compounded by a soft job market and ongoing property sector stress.

Property Sector Remains a Drag

The real estate crisis continues to weigh heavily on China's economy. The bank highlighted a further deterioration in June, with new property starts plunging 26.0% year-over-year and the gross floor area of property sold dropping 16.3% from the prior year.

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This slump was reflected in broader investment trends, as fixed asset investment contracted by 11.2% year-over-year in June. Morgan Stanley's property team noted that home sales, which had shown signs of an uptrend in May, reversed course and declined again last month.

Policy Outlook and Industrial Bright Spots

Despite the slowdown, Morgan Stanley does not anticipate a supplementary budget or major new stimulus measures. The bank noted that approximately 2 trillion yuan in fiscal resources remain available for deployment in the second half of the year. Policy focus is expected to center on strategic sectors like artificial intelligence and energy infrastructure, rather than broad-based consumption support, amid rising US-China technology competition.

While the property and consumption data were weak, some industrial indicators showed resilience. Industrial production rose 5.3% year-over-year in June, accelerating from May's 4.5% pace. The official purchasing managers index (PMI) also edged up to 50.3, remaining in expansionary territory. The firm expects moderately stronger sequential growth in the second half, aided by faster budget deployment and normalizing oil prices.