China’s economy grew at the slowest pace since the country was first hit by the coronavirus outbreak two years ago, making Beijing’s growth target for the year increasingly unattainable as economists downgrade their forecasts further.

The 0.4% expansion in gross domestic product reported for the three months to June, when dozens of cities including Shanghai and Changchun imposed lockdowns, was the second weakest ever recorded. Goldman Sachs Group Inc. promptly cut its full-year growth forecast to 3.3%, saying the figures suggest Covid lockdowns last quarter took a heavier-than-expected toll on the economy. 

The slowdown means Beijing will miss its GDP target of about 5.5% by a wide margin this year, the first time that’s likely to happen. The government didn’t set a target in 2020, during the first wave of the coronavirus outbreak, and only missed it slightly by 0.2 percentage point in 1998.   

China’s outlook remains highly uncertain as President Xi Jinping stays committed to his Covid Zero approach of stamping out infections, with the emergence of the highly-infectious BA.5 sub-variant in several cities raising the threat of new lockdowns. The number of confirmed Covid cases on Friday hit the highest since May. 

With China a major buyer of commodities from oil to coal to corn, the economy’s slowdown is a blow to a global economy already hit by recession fears. Data earlier this week showed China’s import growth slowed to just 1% in June. 

Covid Zero means China “won’t make much of a contribution,” to global demand this year, said Chen Long, an economist at Beijing-based consultancy Plenum. “The base case is for more Beijing-style ‘soft’ lockdowns. Factories will run and trucks will be able to drive, so the industrial side will hold up well but consumption will be limited.”

Xi has de-emphasized the importance of the GDP target in recent years, writing into a key Communist Party document last year that it should no longer be a “sole criterion of success.” Economists think it’s likely the goal will be downplayed rather than abandoned, with preserving jobs becoming the top priority.

Making matters worse for the economy, Friday’s data showed no sign of improvement in the slump in China’s property investment, which drives demand for goods and services worth about 20% of China’s GDP. Banks have been rattled this week by reports that households in dozens of cities have stopped paying mortgages due to property developers’ failure to complete construction of their homes.

With growth in the first six months of the year reaching just 2.5%, the data “means this year’s 5.5% growth is out of the water,” Wei Yao, chief Asia-Pacific economist at Societe Generale SA, said in an interview on Bloomberg Television. The economy would need “a very, very strong recovery in the second half to hit 4% for this year,” she added. 

If growth was 1% in the second quarter, the economy would need 7.5% expansion in the second half to meet the annual target, Wang Yiming, an adviser to the China’s central bank, said last month. Before the data was released Friday, the median forecast of economists had been for GDP to expand just over 4% this year. 

Although official data showed a marginal expansion in GDP, several high-frequency indicators had pointed to activity actually shrinking in the quarter. Travel data showed passenger trips taken on China’s roads were mostly below last year’s levels into July, while car purchases, which make up about 10% of monthly retail sales, fell more than 10% in the quarter. 

Friday’s data showed other areas of stress: The services sector -- which accounts for more than half the economy -- contracted 0.4% in the second quarter compared with a year ago. The youth unemployment rate climbed to a new record of 19.3% in June, even though the overall employment rate improved slightly as cities eased lockdowns.

“The foundation for sustained economic recovery is not stable,” as the impact of domestic Covid outbreaks “hasn’t been eliminated entirely,” the National Bureau of Statistics said in a statement accompanying the release of the data. It warned of “rising stagflation risks” in the world economy.

Chinese stocks extended losses in afternoon trading, with the benchmark CSI 300 Index closing 1.7% lower, the biggest drop since late May. The offshore yuan weakened 0.3% to 6.7799 per dollar as of 3:04 p.m. local time. The futures contract on China’s 10-year bond rose 0.1%.

Consumption improved in June after financial and trade hub Shanghai emerged from its crippling lockdown that began in March and restrictions in several other cities were eased as virus cases fell. The heavy toll of Shanghai’s lockdown was clear from the data, with the city’s economy contracting 13.7% in the second quarter from a year earlier.

Other highlights of the official data released on Friday:

  • Industrial output rose 3.9% in June from a year earlier, up from May’s increase of 0.7%
  • Retail sales grew 3.1%, compared with a contraction of 6.7% in May
  • Fixed-asset investment grew 6.1% in the first half of the year
  • The surveyed jobless rate eased to 5.5% from May’s 5.9%.
  • Home prices fell 0.1% month-on-month in June

On a symbolic visit to the city of Wuhan last month, Xi said the Covid Zero approach was “economical” in the long-term and helped avoid “unimaginable” consequences for public health -- a likely reference to hospitalizations and deaths. About 90% of China’s population have received two doses of domestically made vaccines, but a smaller proportion have the three doses needed to ensure increased protection. Vaccination rates among the elderly are not as high as those levels.

China’s growth in the second half of the year will hinge mainly on how fast authorities can bring new outbreaks under control and how much stimulus it can deploy. Beijing has been beefing up infrastructure spending to help offset the slump in growth. The government and policy banks are making 7.2 trillion yuan ($1.1 trillion) available for projects, according to calculations from Bloomberg News. 

The PBOC has taken a cautious easing path this year, refraining from cutting policy rates since January. Earlier Friday, it kept the rate on its one-year policy loans unchanged at 2.85%. 

“We are seeing that the Fed is hiking rates at a very aggressive way,” Betty Wang, senior economist at Australia and New Zealand Banking Group Ltd., said on Bloomberg Television. “So that’s why we think that from policy makers’ perspective, especially on monetary policy, this is not a good chance for China to cut the monetary policy rate.”