China’s economy has recorded its worst quarterly performance in over two years, after months of harsh Covid lockdowns wreaked havoc across the country. Gross domestic product in the world’s second largest economy expanded by just 0.4% in the three months to June 30, compared with the same period last year, according to the National Bureau of Statistics (NBS) on Friday. That was sharply lower than the 4.8% increase it registered in the previous quarter and far below the 1% growth estimated by economists in a Reuters poll. On a quarterly basis, GDP shrank 2.6%. It was the weakest performance since the first quarter of 2020, when China’s economy came to a near standstill as it battled to contain the initial coronavirus outbreak that started in Wuhan. In that quarter, GDP contracted 6.8%. For the first half of this year, the economy expanded 2.5%, way below the 5.5% annual target set by the government. Beijing admitted Friday that reaching its GDP goals this year would be hard. “There are challenges to achieve our expected economic growth target for the whole year,” said Fu Linghui, a spokesperson for the NBS, at a press conference in Beijing. But he expected the economy to rebound in the second half. Mounting challenges Chinese policymakers face mounting challenges to keep growth steady, as the country contends with a sharp slowdown in activity due to Beijing’s stringent zero-Covid policy, a bruising regulatory crackdown on the private sector, and a real estate crisis that is causing rising bad debts at banks and growing social protests. Since March, Beijing’s uncompromising attitude to stamping out the virus led to months of lockdowns in dozens of cities across the country, including Shanghai, the nation’s financial and shipping hub. Millions of residents were confined to their homes, shops and restaurants were closed, and factories were shut, hammering consumer activity and disrupting supply chains. Authorities began reopening the economy at the start of last month, lifting restrictions in some key cities. The manufacturing and services industries have shown signs of improvement in recent weeks. But Beijing’s adherence to the zero-Covid stance has caused huge uncertainty for businesses and dampened investor sentiment. Consumer spending remains weak, while the job market is under significant pressure — youth unemployment hit a new record high of 19.3% in June. In the press conference on Friday, Fu said that the economy has taken an “unexpected, severe” hit from domestic and external factors. Higher global commodity prices, especially food and energy prices, have added to imported inflation. Growing stagflation risks around the world also threaten China’s economic stability, Fu said. The poor performance in the second quarter “reflected the significant shocks from the Omicron outbreak and corresponding stringent measures adopted in major cities,” said Chaoping Zhu, Shanghai-based global market strategist for JP Morgan Asset Management. “Looking forward, we expect to see continued economic recovery in the second half of this year, mainly supported by government-led infrastructure investment,” he said, adding that if the government eases Covid restrictions further, consumer confidence could bounce back at a faster pace. But the property sector may still pose a downside risk to growth, Zhu said. Larry Hu, chief China economist for Macquarie Group, said latest data imply that GDP growth has to accelerate to more than 7% in the second half to deliver annual growth of 5% for the whole year. “It is impossible without a significant escalation of policy stimulus from the current level,” he said. Property slump drags There were some bright spot in Friday’s economic data. Mining and manufacturing recorded growth of 0.9%, compared with the second quarter last year. And retail sales in June grew 3.1% from a year ago, helped by a jump in car sales boosted by pent-up demand and policy support on electric vehicles. Industrial production also rebounded in June, up 3.9% from a year ago. But the vast real estate sector remains a major drag. Property investment dropped 9.4% in June from a year ago, after falling 7.8% in May, according to Macquarie Capital calculations based on government data. Property sales by floor areas decreased 18% last month, following a 32% plunge in May. “Plunging sales means that developers are facing a liquidity crunch,” Hu said. “The property woe is causing rising social instability, evidenced by the recent mortgage boycott,” he added. Over the last few days, desperate homebuyers across dozens of cities have refused to pay mortgages on unfinished homes. The payment boycott comes as a growing number of projects have been delayed or stalled by a cash crunch that saw giant developer Evergrande default on its debt last year and several other companies seek protection from creditors. Zhu from JP Morgan Asset management said that the increasing number of unfinished homes pose a big risk to banks’ financial health. “Decisive and effective regulatory measures must be taken to prevent the mortgage boycott from developing into a systemic risk,” he said.