China's National Bureau of Statistics is scheduled to release the nation's economic data for the first half of the year on July 15. Given a complex external environment and the need for further consolidation of domestic demand recovery, this "report card" for the Chinese economy is attracting significant market attention. Based on forecasts already disclosed by various institutions, economic growth in the second quarter is highly likely to have moderated compared to the first quarter. Several research institutions project that second-quarter GDP will grow by 4.2% to 4.5% year-on-year, with first-half GDP growth expected to remain within the range of 4.5% to 4.7%.
China has set its annual economic growth target for this year between 4.5% and 5%. If the first-half growth rate settles around 4.5%, what level of growth is required in the second half to achieve the full-year target? Multiple institutions believe that with increased counter-cyclical policy adjustments, further fiscal policy support, accelerated construction of major projects, and the continued implementation of policies to boost consumption and stabilize investment, economic growth in the third and fourth quarters is expected to see a modest rebound compared to the second quarter. The full-year GDP growth rate is forecast to be around 4.7%.
Second-Quarter GDP Growth May Show Slight Deceleration
Predictions compiled from eight institutions indicate a high probability that second-quarter GDP growth moderated from the first quarter. Among these, four institutions forecast second-quarter GDP growth of 4.5% year-on-year, two estimate 4.4%, one projects 4.7%, and another expects 4.2%. Overall, the market consensus is that the economy operated generally stably in Q2, but the momentum of recovery weakened compared to Q1.
Some analysis suggests that due to changes in the external environment, a marginal slowdown in fiscal policy intensity, and pressures on household balance sheets, China's economy in the second quarter exhibited a "K-shaped divergence" characterized by external demand outperforming domestic demand, upstream sectors outperforming downstream sectors, and new growth drivers outperforming old ones.
Exports Remain a Key Pillar of First-Half Growth
From the demand perspective, exports continued to be a crucial support for the economy in the first half. From January to May, China's total goods trade import and export volume, measured in RMB, reached 20.68 trillion yuan, a year-on-year increase of 15.3%, with exports growing by 11.8%. Despite numerous external uncertainties, exports have demonstrated notable resilience. This resilience is attributed to demand growth in the industrial chain driven by the rapid global development of the artificial intelligence industry, as well as China's competitive advantages in manufacturing and the diversification of its export markets.
Currently, the development of the AI industry is driving demand in sectors such as servers, electronic equipment, electrical equipment, energy storage, and new energy. China's manufacturing advantages within these related supply chains provide support for exports. Simultaneously, strengthening trade links with markets in ASEAN, the Middle East, Latin America, and Africa have made emerging markets a significant supplement to export growth.
Domestic Demand Recovery Faces Persistent Challenges
In contrast, the recovery of domestic demand continues to face certain pressures. Data shows that from January to May, total retail sales of consumer goods grew by 1.4% year-on-year, while fixed asset investment fell by 4.1%, and real estate development investment declined by 16.2%, all weaker than the first quarter. Some institutions believe that insufficient consumer willingness, the ongoing adjustment in the real estate market, and weakened investment momentum in some traditional industries are key reasons for the relatively slow recovery of domestic demand.
Divergent Performance Across Production and Investment Sectors
From the production side, performance varies across different industries. Many emerging industries representing industrial upgrading directions have maintained relatively rapid growth, becoming a significant pillar of industrial growth. From January to May, value-added in China's high-tech manufacturing sector grew by 13.1%, with the growth rate further accelerating to 15.1% in May, reaching its highest level in nearly five years. Sectors such as electronic device manufacturing, aircraft manufacturing, and biopharmaceutical manufacturing have been particularly active.
In May, value-added in the electronics industry grew by 17%, contributing significantly to industrial growth. In terms of products, output of integrated circuits and industrial robots maintained rapid growth, reflecting continued strong vitality in areas related to intelligent manufacturing and industrial upgrading.
A similar trend is observable from the investment side. From January to May, investment in China's high-tech industries still grew by 4.5%. Within this, investment in computer and office equipment manufacturing, aerospace equipment manufacturing, and information services grew by 18.3%, 16.7%, and 13.8% respectively. Concurrently, investment in some traditional industries is under pressure. Investment in metal products, specialized equipment manufacturing, and automobile manufacturing fell by 4.0%, 8.0%, and 2.7% respectively. This indicates that during the economic transformation, capital is shifting from traditional growth areas towards industries with higher technological content and greater growth potential.
Overall, however, the supply side has maintained a degree of resilience. From January to May, value-added of industrial enterprises above a designated size grew by 5.4% year-on-year, and the services production index grew by 4.8% year-on-year. In June, the manufacturing Purchasing Managers' Index (PMI) rebounded into expansionary territory, with improvements in the production, new orders, and new export orders indices, indicating marginal improvement in economic operations.
Nevertheless, some analysis suggests that the current economic recovery still relies primarily on the momentum of certain advantageous industries. Pressures remain regarding the business climate for small enterprises, employment-related indicators, and the supply-demand situation in some traditional sectors.
Real Estate and Exports as Pivotal Factors for the Second Half
An important recent change in China's economic data is the rebound in inflation and the acceleration of nominal GDP growth, with a core observation indicator being the GDP deflator. The GDP deflator is calculated as the ratio of nominal GDP to real GDP. A negative index, where nominal GDP growth is lower than real GDP growth, implies pressure on the growth of household income, corporate revenue, and fiscal revenue.
In the first quarter, China's GDP deflator fell by 0.1% year-on-year, with the decline narrowing significantly. Nominal GDP grew by 4.9% year-on-year, the highest growth rate since the second half of 2023. Meanwhile, from April to May, the Producer Price Index (PPI) grew by 2.8% and 3.9% year-on-year respectively, accelerating its rebound. The Consumer Price Index (CPI) grew by 1.2% year-on-year for two consecutive months, continuing its upward trend.
Some investment analysis suggests that the rebound in PPI and CPI growth indicates that the Q2 GDP deflator is likely to turn positive, potentially ending a streak of 12 consecutive quarters of negative growth. Faster nominal GDP growth would help improve corporate income, profits, fiscal revenue, and household income, further driving the recovery of domestic demand.
Data for June CPI and PPI has already been released. Influenced by seasonal factors and fluctuations in international market prices, the CPI in June fell by 0.3% month-on-month and rose by 1.0% year-on-year. The core CPI, which excludes food and energy prices, rose by 1.0% year-on-year.
Affected by declining international crude oil prices and seasonal factors, the PPI in June fell by 0.3% month-on-month and rose by 4.1% year-on-year, with the year-on-year increase expanding by 0.2 percentage points from the previous month, related to a lower base from the same period last year.
Some research indicates that this year, China's price levels have moved out of the bottom range and entered a new phase of moderate inflation, preliminarily achieving the government work report's goal of "promoting the overall price level to turn from negative to positive." This has manifested as a favorable pattern of continuous recovery in upstream industrial product prices, a moderate increase in downstream consumer goods prices, and a steady upward trend in the overall price level.
Looking ahead to the second half of the year, under the intertwined influence of multiple factors, the price trend is expected to be generally positive, showing a pattern of being higher in the earlier part and stabilizing later.
Outlook for the Second Half of the Year
Overall, in the first half of 2026, the Chinese economy exhibited a pattern of "rising first then moderating, with significant divergence," with the overall trend resembling a "shallow V-shape." How will China's economic trajectory unfold in the second half?
A chief economist and research head at a securities firm believes that the economic direction in the next phase depends on two key variables: real estate and exports. One-fifth of export volume and half of the contribution to export growth come from AI, meaning the export variable is closely linked to the development of AI—if AI development is strong, exports are more secure.
However, it must also be noted that the adjustment in the real estate market is still ongoing. While second-hand housing prices in some first-tier cities have shown signs of stabilization, national real estate sales and investment still face pressure. Future stabilization of the real estate market will require efforts to boost demand recovery, optimize supply, and further improve local governments' capacity to stabilize the property sector.
Simultaneously, exports are expected to remain resilient in the second half. Some macroeconomic analysis suggests that the recovery of the global manufacturing cycle and a phase of easing in China-U.S. relations will continue to support exports and trade chains. Among these, improvements in China-U.S. economic and trade relations will help enhance corporate expectations regarding orders, inventory, investment, and supply chain layout, restore corporate confidence in engaging in international trade and increasing capital expenditure, and provide support for maintaining export resilience.
Synthesizing judgments from multiple institutions, the overall economic rhythm for this year may present a "U-shaped trajectory." It is projected that third-quarter GDP growth will be approximately 4.7%, fourth-quarter growth around 4.8%, with full-year GDP growth likely falling within the range of 4.5% to 4.7%.
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