China's Economy Slows to Three-Year Low in Second Quarter

China's economy experienced a sharp slowdown in the second quarter, registering its weakest performance in at least three years. This deceleration, driven by sluggish domestic demand and the impact of the war in Iran on oil prices, overshadowed the country's robust exports. Official data revealed that the world's second-largest economy grew by 4.3% in the second quarter, a notable drop from the 5% growth recorded in the first quarter.

These figures fall below the government's official growth target of 4.5%-5%, a target that was lowered in March to its lowest since 1991. Analysts suggest this adjustment provides officials with greater flexibility in managing the economy. The second-quarter data, the first to be fully affected by the war in Iran since its outbreak on February 28, shows the lowest quarterly growth since late 2022, when China was emerging from strict pandemic-related lockdowns.

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There are more external factors of instability and uncertainty.

The National Bureau of Statistics of China cited "more external factors of instability and uncertainty" in its announcement. It also highlighted an imbalance between strong supply and weak demand within the domestic economy. Additional data released on Wednesday underscored domestic challenges, including a prolonged downturn in the property market and weak consumer spending. Retail sales saw a 1.0% increase in June, an improvement from May's 0.6% decrease, but new home prices continued to decline, albeit at a slightly slower pace.

Fabien Yee, an analyst at IG, explained to the BBC that Chinese businesses are absorbing higher energy and raw material costs because "market demand is too weak to withstand price increases." She noted that the situation will become more difficult the longer the war in Iran continues. The weak growth figures are expected to dominate the agenda when the ruling Communist Party's decision-making Politburo convenes later this month. Officials may opt to accelerate spending and boost infrastructure investment, reversing recent spending cuts that curbed growth after an initial unexpected recovery.

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market demand is too weak to withstand price increases.