Goldman Sachs, Nomura cut China GDP outlook amid worst heatwave in 60 years

Yahoo Finance's Akiko Fujita and Brian Cheung discuss the slowdown of the world's second-largest economy.

Video Transcript

- Let's move on to another headline we're watching today. Goldman Sachs and Nomura having slashed their forecast for China's GDP growth again. Goldman downgrading its 2022 forecasts to 3%. That is the third time that Goldman has cut the target down from 3.3%. The Japanese investment bank meanwhile cutting its target to 2.8%. Also down from 3.3%. That is one of the lowest targets that we have for China. Of course, all of this comes on the back of China's own growth target. 5 and 1/2% is what we're looking at. Increasingly, it certainly doesn't look like that's kind of where things are going. A number of factors cited by these investment banks.

Obviously, we've talked enough about zero-COVID policy. We've talked a lot about what's been happening in the real estate sector as well. But one thing that's really worth noting I think we haven't talked enough about are the heat waves and the droughts that are happening in China. Factories in Sichuan province, already some of them suspending their operations because of concerns around electricity, specifically hydropower generation.

You've got government offices asking workers to set air conditioners to nothing below 79 degrees Fahrenheit. They're calling on them to take stairs instead of take the escalator. And then, of course-- or elevator. And then you had President Xi out in the northern province calling on local authorities to do more, be more aggressive to fight the drought. Not sure what exactly those measures would be. But this is increasingly becoming an economic story. It's not just about the climate.

- Oh, yeah. Absolutely. 113 degrees Fahrenheit in Chongqing. I mean, when you think about in totality all of these things, the heat waves are heat waves. I mean, we're seeing similar situations here in the United States where a lot of localities are asking residents to try to ration the amount of electricity and water that they're using in many cases.

That's something that I'm sure China was going to have to deal with regardless of what their kind of political system is like. But when you think about the zero-COVID policy that the government chose to go down as opposed to loosening the policies like a lot of other advanced nations have done, you wonder about what that's going to do to specifically that younger cohort of this critically large economy when you consider that the jobless rate among China's youth is 20%.

All of these things have social structures that bleed into what could be longer standing-- and we brought this point up many times on the show-- socioeconomic, I don't want to say unrest, per se, but you do wonder about whether or not some of the protests that we're starting to see. A lot of banks in the central part of China having some corruption scandals and people are doing some strikes. There are mortgage strikes happening in more than 100 cities across China with the leveraged market inspiring a lot of renters to say, I don't think that we're being treated fairly here . There's a lot of factors and threads happening here.

- And of course, all of this happening on the backdrop of us being a few months away from President Xi really seeking out his third term. I mean, I would argue the zero-COVID policy is something he can control. He's just choosing not to. But the climate issue is not something necessarily that China can do a whole lot about. Sure, they have moved more to coal power. They're moving away from renewables. I mean, there's other things. But when you've got a policy zero-COVID that is so restrictive to start with, you've already seen the economic pullback, on top of that, you get what's happening on the climate front--

- That's the point I was trying to make

- --which has led to production--

- It's the confluence of these together.

- Exactly. Yeah. And increasingly, it feels like, I mean, 3%, you know, Goldman, again, this is the third time they've cut it. Maybe 3% is optimistic. Maybe that's more realistic. But we should point out China usually doesn't set targets they can't reach. And that 5 and 1/2% is something they have stood by. Increasingly, they have raised questions about whether, in fact, that is possible. But when you think back to the conversation a few months ago, it was about whether, in fact, China can beat the US growth target. That was sort of the mandate that came down from the top. Now they're looking at, can they even meet their own target?

- And to be fair, the last point I'll make here is that 5.5%, that would still be a market downgrade from the double digit pace that we had seen prior to the pandemic. 3%, which would be fantastic if we got here in the United States this year, that would be a remarkable, remarkable downgrade for the second largest economy in the world.