BEIJING: Six months after China’s government set ambitious economic targets for the year, growth has slowed so sharply that several major banks don’t even think 3% is achievable anymore.

Growth projections have come down steadily since March, when the official target of around 5.5% was first disclosed.

The consensus in a Bloomberg survey is for the economy to expand 3.5% this year, which would be the second-weakest annual reading in more than four decades.

Forecasters at Morgan Stanley and Barclays Plc are among those predicting even slower growth as risks mount into year-end.

It’s not just China’s strict zero-Covid Zero of lockdowns and mass testing that’s buffeting the economy. A housing market collapse, drought, and weak demand both at home and overseas have all undercut growth.

Jian Chang, Barclays’s chief China economist, last week cut her full-year growth forecast to 2.6% from 3.1%, citing the “deeper and longer property contraction, intensified Covid lockdowns, and slowing external demand.”

The cash crunch faced by developers will extend into 2023 and weak confidence in the real-estate market and the economy will hold back any meaningful recovery in home sales, she wrote.

Official data for August, due to be published today, will likely show little improvement in industrial output, retail sales and investment. September’s figures don’t look any better either, with early indicators showing further contraction in the housing market and damage to consumer spending because of travel restrictions.

China’s recovery likely stalled in August, hit by heatwaves, power shortages and Covid-19 flare-ups - on top of a property slump.

Leading indicators signal weakening momentum from output to consumption.

With the Communist Party gearing up for its twice-a-decade leadership congress in mid-October, Covid restrictions are being tightened and travel is being discouraged to avoid the spread of infections, throwing a pall over tourism spending during the nine-day National Day holiday break at the start of next month.

The biggest drag on the economy is the zero-Covid policy, which the government remains committed to despite more infectious virus strains making it harder than ever to control outbreaks.

The virus has spread to every province this year and almost 865,000 people have been infected. Major cities like Shanghai, Shenzhen and more recently Chengdu have locked down their populations and shut businesses to curb outbreaks. Frequent Covid testing is required - as often as every 48 hours in Beijing now - even in places where there are no outbreaks.

The restrictions have taken a toll on consumers, with spending taking months to recover after lockdowns.

The official consumer confidence index plunged to its lowest level in nearly 10 years in April and it’s barely recovered since.

Tourism has been decimated. “The overall economic impact of Covid restrictions almost certainly worsened at the margin in August, and likely will again in September,” Ernan Cui, an analyst at Gavekal Dragonomics, wrote in a recent report.

“The repeated high-profile lockdowns in major cities such as Shenzhen might remind households of the possibility of more disruptions to come, encouraging them to consume less and save more - as they have since the start of the pandemic.”

While some China watchers have speculated the zero-Covid policy may be eased after the Communist Party’s congress in October, economists at Nomura Holdings Inc and Goldman Sachs Group Inc say that’s unlikely.

Nomura predicts the policy will remain in place until at least March next year. If it’s gradually eased from then, the economy could be in for a difficult period with people overwhelmed by a surging Covid infection,” Lu Ting, Nomura’s chief China economist, wrote in a recent report.

Aside from the direct healthcare costs of a spike in illness and death, a widespread outbreak would also mean extended disruptions to business and consumer activity as people stay home to avoid getting infected and absenteeism from work rises.

What started in 2020 as an attempt by the government to cut the amount of risky debt held by property developers has developed into a crisis for the entire property market.

Major builders have defaulted and halted construction, home owners have halted mortgage payments because of unbuilt homes, and demand for concrete, steel and everything else needed to build apartments have slumped.

There’s no sign that the contraction in home sales - which began in July last year - has eased.

The almost 900 billion yuan (US$129bil) of homes sold in July this year was about 30% below the amount sold a year earlier.

 - Bloomberg