How Bad Are Things in China? Goldman Sachs Just Slashed Its Growth Forecast to Zero

Goldman Sachs has become the latest bank to cut its China growth forecast, citing the country’s power crunch, now expecting zero gross domestic product growth in the third quarter.

Production has been halted at a number of factories, including some supplying Apple (ticker: AAPL) and Tesla (TSLA), due to widespread shortages, partly caused by tight coal supply and increased demand post-Covid lockdowns. Strict emissions targets introduced by Beijing, as part of an effort to fight climate change, are also a factor and have led to local authorities curbing energy use to avoid exceeding limits.

Goldman Sachs (GS) lowered its GDP growth projection for the third quarter to 0% quarter-over-quarter, down from 1.3 percent previously, and lowered its fourth-quarter forecast to 6% from 8.5 percent. The third-quarter growth prediction was lowered from 5.1 percent to 4.8 percent, and the fourth-quarter forecast was lowered from 4.1 percent to 3.2 percent.

China's energy constraints were described as "yet another growth shock" by the Wall Street bank, which dropped its full-year 2021 GDP growth prediction to 7.8% from 8.2% previously.

The bank's analysts, lead by Hui Shan, wrote in a report that "recent severe cuts in production across a range of high-energy-intensity industries add to the already strong downside pressures in the growth outlook."

They said there is still "substantial uncertainty" coming into the fourth quarter, citing the China Evergrande (3333.HK) stressors and the government's approach to manage them as examples.

According to them, the energy issue is a “new but tightening” growth constraint, adding to downward pressures on property sales and construction, Covid limitations to combat local breakouts, and Beijing's broad regulatory crackdown.

This isn't the first time the company has been downgraded. Nomura lowered its full-year GDP growth projection from 8.2% to 7.7% on Friday. Ting Lu, the bank's senior China economist, warned the figure may be even lower.

In a letter, he wrote, “Beijing's unparalleled resolution in imposing energy consumption limits may result in long-term gains, but the short-term economic costs are substantial.”

The shortages, according to China International Capital Corp. (3908.HK), will reduce the country's growth rate by 0.1 to 0.15 percentage points in the third and fourth quarters.

Morgan Stanley analysts predict a one-percentage-point drop in GDP growth in the fourth quarter if the output restrictions continue for the remainder of the year.