Early Look: China’s Economy Likely Slowed A Tad Amid Stronger Headwinds

China’s economic growth likely moderated a tad in the second quarter, economists say, though uncertainties at home and abroad are casting a shadow on the outlook for the world’s second largest economy.

The economy likely expanded 6.6% from a year earlier in the second quarter of 2016, a mite slower than the 6.7% on-year growth in the previous quarter, according to a median forecast of 15 economists polled by The Wall Street Journal. Growth has been moderating for the past three quarters in a row and has been gliding downward since 2011.

China’s policymakers are facing a series of challenges, from reducing industrial overcapacity to dealing with defaults on debt, and rising risks from capital outflows and a weakening currency, economists of Mizuho Securities Asia said in a note.

If Beijing carries through with plans to reduce excess capacity and consolidate “zombie” enterprises–state firms that live off credit but struggle to make profits–“economic growth will inevitably suffer in the short term,” they said.

On top of those challenges, heavy rainfall that flooded southern parts of the country in recent weeks is likely to impact inflation and industrial and agricultural output.

China’s government is due to release a slew of indicators in the coming week. Beyond the growth rate, other measures of the economy’s condition are also expected to show a slight weakening, according to the survey.

Value-added industrial output likely rose 5.9% in June from a year ago, slowing from 6.0% on-year growth in May. Investment in fixed assets outside rural households, a long-time growth engine, likely rose 9.3% in the first half of the year, slowing from the 9.6% increase over the first five months of the year. Retail-sales growth is also expected to decelerate, to 9.9% in June from May’s 10.0%.

The heavy rains along the Yangtze and Pearl river deltas–key hubs of industrial and agricultural products–could disrupt production and drive up inflation, economists of the Australia and New Zealand Banking Group said.

Food prices, which had risen over the winter and remained elevated following the Chinese New Year, have retreated, easing inflation in June. The consumer-price index likely rose 1.8% from a year earlier, slowing from a 2.0% year-over-year growth in May, the same survey showed. June’s slower consumer inflation could be temporary as floods will likely push up vegetable prices over the next few months, ANZ economists said.

China’s producer price index, a gauge of factory-gate prices, likely dropped 2.5% from a year earlier in June, improving from a 2.8% year-over-year decline in May.

The country’s trade of goods with the rest of world also faces more headwinds than before. External demand likely remain tepid amid persistent global uncertainties, especially following recent market turmoil touched off by Britain’s vote to leave the European Union, economists said.

China’s outbound shipments likely dropped 5.0% year-over-year in June, extending May’s decline of 4.1%, according to the survey. Imports are expected to have fallen 6.4% from a year ago, compared with a 0.4% year-over-year decrease in May. That would bring China’s trade surplus to $45.65 billion in June, smaller than May’s surplus of nearly $50 billion.

The government and the economy received some surprise relief this week when foreign exchange reserves, after falling in May, showed an unexpected increase for June: a rise of $13.43 billion from the previous month for a total of $3.205 trillion.

Despite that, the size of the nation’s net capital outflow remains large, said economists of Citigroup Global Markets Inc. They estimate net capital outflows reached between $281.7 billion and $286.6 billion in the first half, and for the full year could hit $573.2 billion.

— By Liyan Qi

Copyright (c) 2016 Dow Jones & Company, Inc.