People cross the street in hot weather on August 15, 2022 in Guangzhou, China. The country is suffering from its worst heatwave in decades, which is straining the electricity supply.
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Goldman Sachs and Nomura lowered their forecasts for China’s growth, citing weaker demand, uncertainties surrounding the zero-Covid policy and an energy crisis.
Goldman Sachs lowered its full-year 2022 guidance to 3.0% from 3.3%, while Nomura lowered its full-year guidance to 2.8% from 3.3%.
The cuts reflect continued pessimism among investment banks about Beijing’s growth target of around 5.5%. In July, Chinese officials hinted that the country could miss its GDP target for the year.
Goldman economists cited the latest economic data for July and short-term energy constraints due to an unusually hot and dry summer. China is suffering from one of the worst heatwaves in decades, straining an already strained electricity supply and leading to production cuts in some parts of the country.
Economists at both banks also noted rising Covid cases across the country, as well as a fall in real estate investment in July, dragging down overall investment.
Nomura, which continues to maintain one of the lowest estimates for China’s growth, said it still believes Beijing will stick to its zero-Covid policy until March 2023. It said that stance is likely to remain a major drag on the real estate sector. In May, UBS lowered its forecast to 3%, the lowest among estimates tracked by CNBC at the time.
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Surprise rate cuts
The forecast cuts come after the People’s Bank of China unexpectedly cut two interest rates — its medium-term policy loans and a short-term liquidity instrument — for the second time this year on Monday.
Nomura and Goldman both noted that Beijing’s stimulus response may be quite limited.
“Contrary to some people’s concerns about too much policy stimulus in H2, the real risk is that Beijing’s policy support may be too small, too late and too inefficient,” Nomura said.
Goldman Sachs said the surprise rate cuts don’t necessarily signal the start of more aggressive easing, adding that policymakers face not only economic but also political constraints.
“Your current focus is likely to contain further downside risks and ensure employment and social stability ahead of the 20th Congress,” it said.