Export-Driven Growth Amidst Ongoing Real Estate Drag

Overview

In its 2026 mid-year market feedback report, Morgan Stanley notes that while robust export growth has prompted an upward revision to GDP projections, a weak domestic real estate market and structural issues continue to constrain policy flexibility. The report emphasizes a K-shaped economic divergence, with exports and manufacturing performing well, while real estate and consumption recovery lag. Furthermore, although the PPI has risen, this is largely supply-side driven and lacks broad-based inflationary momentum. While the new economy shows promise, it has yet to translate into broader economic gains. Ultimately, structural reforms remain critical to addressing lingering challenges.

Core views

Exports have become the primary driver of economic growth, particularly in the manufacturing sector, whereas services and construction remain relatively weak. Data indicate that export growth extends beyond high-tech industries to encompass a wider industrial investment cycle. However, the real estate market has struggled to recover, with limited improvement in second-hand home sales and subdued consumer willingness to purchase; home price expectations continue to weaken. Although the PPI has rebounded, this is mainly supply-side driven rather than demand-led, so inflationary pressures remain muted. Moreover, while high-value-added sectors have supported export growth, the new economy has yet to effectively stimulate domestic employment and consumption, underscoring the structural nature of the recovery. On the fiscal front, local government implicit debt and real estate-related bad debts remain major obstacles, requiring resolution through structural reforms. High household savings rates are curbing consumption growth, and a tax system biased toward investment rather than social welfare further erodes disposable income and spending power. Overall, despite strong export and manufacturing performance, insufficient domestic demand and structural constraints continue to hinder a full economic recovery.

Analysis framework

Morgan Stanley employed a multi-dimensional data analysis approach, conducting quantitative assessments across manufacturing, exports, real estate, and inflation. By comparing historical data with current trends, the report highlights the structural characteristics of the economic recovery. For example, PMI data were used to evaluate manufacturing and service sector performance, housing sales data to gauge real estate market vitality, and PPI and corporate profit data to analyze inflationary pressures and supply-side impacts. Additionally, the report incorporated resident surveys and fiscal data to examine consumption and government spending trends. The overall analytical framework emphasizes cross-validation among datasets to provide a comprehensive picture of the economic landscape.

Methodology notes

• Supply-Demand FrameworkSupply-demand framework

  Export growth and manufacturing recovery reflect improvements on the supply side

  By analyzing export and manufacturing PMI data, the contribution of supply-side improvements to economic growth is assessed.

• Supply-Demand FrameworkSupply-demand framework

  PPI rebound is primarily supply-side driven

  By decomposing the PPI components, the main drivers of price increases are identified to determine the nature of inflation.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Analysis of the sustainability of export growth

  Export growth is broken down into volume and price factors to assess its underlying drivers.

• Macroeconomic frameworkPhillips curve

  Relationship between corporate revenue and employment

  By analyzing the correlation between corporate revenue growth and employment expansion, the breadth of economic recovery is evaluated.

• Industry/Industrial Analysis FrameworkPenetration Rate S-Curve

  Substitution effect of the new economy on traditional sectors

  The extent to which new technologies and high-value-added industries penetrate and displace traditional sectors is assessed.

Key data

• Year-on-Year Export GrowthHigher than Manufacturing GDP GrowthExport growth has become the primary driver of the economy
• Magnitude of Improvement in Real Estate SalesLimitedSecond-hand residential sales have shown no significant improvement
• Drivers of PPI ReboundPrimarily Supply-SideLacking broad demand-side support
• Household Savings RateApproximately 33%Curbing consumption growth
• Share of the New EconomyStill Relatively SmallHas Yet to Effectively Stimulate Domestic Employment and Consumption

Impact & implications

Export growth and manufacturing recovery provide support to the economy, but the persistent weakness of the real estate market and structural issues limit the scope for policy easing. The PPI rebound is predominantly supply-side driven, indicating limited inflationary pressure and constraining significant monetary policy relaxation in the near term. While the new economy shows promise, it has yet to generate meaningful spillover effects across the broader economy. Structural reforms are essential to resolving real estate bad debts and local government liabilities, as well as to boosting household incomes and consumption capacity, enabling a more balanced economic recovery.

Risks

• Continued weakness in the real estate market could weigh on economic growth
• Slow or below-expectations progress in structural reforms
• Weakening export momentum may undermine manufacturing recovery
• Inflation failing to accelerate as expected could constrain policy space

What to watch

• Trends in real estate sales and prices
• Correlation between PPI and CPI
• Introduction and implementation of structural reform measures
• Impact of the new economy on employment and consumption