The world’s second-largest economy grew by 7.7 percent over a year earlier, down from the previous quarter’s 7.9 percent, the government reported Monday. That fell short of many private sector forecasts that growth would accelerate slightly to eight percent.
A recovery still is under way but is “really very soft — very slow and gradual,” said Societe Generale economist Wei Yao.
Analysts have warned that China’s recovery, from its deepest slump since the 2008 global crisis, is weak, and is being supported by bank lending and government-led investment, while growth in consumer spending is subdued. A slowdown in Chinese growth and demand for goods, ranging from iron ore to factory technology and consumer goods, could send out ripples in the global economy.
The unexpected growth setback could add to challenges for Communist Party leaders, who took power over the past six months. They are trying to avoid job losses while they pursue more self-sustaining growth, based on domestic consumption instead of exports and investment.
Last year’s slowdown was largely due to Beijing’s efforts to cool inflation and steer double-digit growth to a more sustainable level following a quick, stimulus-fueled rebound from the global crisis. Beijing responded with further stimulus efforts, including looser credit. However, analysts say Chinese leaders are unlikely to repeat that strategy, which led to a sharp rise in debt.
The latest quarterly growth was above Beijing’s official target of 7.5 percent for the year. That is well above forecasts in the low single digits for Western economies and Japan, but far from China’s blistering growth of the past decade.
Recent economic data in China has given mixed signals, raising questions about whether a full-fledged recovery has been gaining traction.
Inflation fell in March, indicating consumer demand might not be as strong as Beijing hoped. Import growth accelerated, suggesting companies and consumers were buying more, but some analysts said those figures might be distorted and unreliable.
Also in March, growth in factory output weakened to 8.9 percent, down one percentage point from the first two months of the year, according to the National Bureau of Statistics.
That was the lowest growth since August 2012, when fears of an abrupt “hard landing” of plunging growth were strong. Beijing responded by boosting lending and government spending.
Chinese leaders are unlikely to repeat that strategy, after a 60 percent surge in credit in the first quarter produced a lackluster response, claimed IHS Global Insight analysts Xianfang Ren and Alistair Thornton in a report.
“We have lost confidence in a robust recovery,” they said.
The rise in credit prompted ratings agency Fitch to cut its rating on China’s long-term local currency sovereign debt last week, warning of potential financial risks.
Fitch said China’s total credit, including informal lending among private entrepreneurs, may have risen to the equivalent of 198 percent of gross domestic product in 2012, from 125 percent in 2008.
Forecasters who expected growth to accelerate might have been misled by inaccurate trade data, due to companies falsely reporting higher exports as a way to evade capital controls and bring money into China, said Moody’s Analytics economist Alaistair Chan.
Despite the surge in lending, Monday’s data showed a slowdown in investment growth that is driving the latest recovery.
First-quarter growth in spending on factories, real estate and other fixed assets declined to 20.9 percent from the 21.1 percent rate for the first two months of the year.
Those figures show the economy suffers from structural problems, including excess production capacity in some industries that makes more investment unprofitable, according to Yao.
“Given all this credit injected into the system, the future should look better,” said Yao. “Nevertheless, the level of efficiency in the economy has declined. The same amount of money will no longer produce the same amount of growth.”
In a positive sign, growth in retail sales edged up to 12.6 percent in March from 12.3 percent for the first two months of the year.
Recent increases in required minimum wages and an improved housing market should help to boost household spending, said Moody’s Analytics economist Fred Gibson in a report.
Still, he cautioned, consumer confidence could be hurt if China’s export weakness persists.
Also on Monday, the World Bank trimmed its growth forecast for China this year by 0.1 percentage point to a still-robust 8.3 percent.