PROFIT growth for China’s industrial firms cooled for a third straight month in July in a further indication that demand in the world’s second-biggest economy is cooling.

Weakening consumption, rising credit defaults, high financing costs and escalating Sino-U.S. trade tensions will likely pressure China industrial companies’ profit growth even further in coming months, analysts at Nomura said in a note.

“We expect the economy to get worse before it gets better,” they said, noting it will take some time for recent government stimulus and policy easing measures to kick in.

Industrial profits in July rose 16.2 percent from a year earlier to 515.12 billion yuan (US$74.94 billion), easing from a 20-percent pace in June and the slowest since March, data from the National Bureau of Statistics (NBS) showed yesterday.

Profit growth slowed in July as producer price inflation moderated, bureau spokesman He Ping said in a statement accompanying the data.

For the first seven months of the year, industrial firms have reported profits of 3.9 trillion yuan, up 17.1 percent from the same period last year.

But the strong headline figure is being driven largely by producers and refiners of raw materials like oil companies and steel mills, which account for roughly two-thirds of the gains. Smaller firms are facing much tougher business conditions that are squeezing profit margins.

Oil, steel, building materials and chemical sectors were key drivers behind the profit growth in the first seven months of the year. But profit growth in nonferrous metal smelting and processing, furniture, railway and aircraft manufacturing fell during the same period from a year earlier.

A spate of weaker data in the last few months has shown investment growth has slowed to a record low and consumers are more cautious about spending. Industrial output growth has also remained soft.

China’s factory price inflation cooled in July amid a slowdown in economic growth, although economists expect punitive Chinese tariffs on U.S goods to add to wider price pressures in months ahead.

China’s steel market is enjoying a sustained boom as China continues its production restrictions to crack down pollution. Shanghai rebar steel futures rallied to a seven-year high last week.

Jiangsu Shagang, China’s biggest private-owned steel mill, reported a 242.3-percent increase in net profits for the first half this year, while Shougang in the capital city of Beijing saw net profits rise 50.1 percent.

The slowdown in China’s industrial profits could translate into a weakening in investment in the manufacturing sector, according to Betty Wang, senior China economist at ANZ.

“Downside risks (to fixed-asset investment growth) still outweigh the upside risks,” said Wang, adding that a low base from last year should have provided support to yesterday’s data.

China’s investment growth may slow even further in the future and authorities should continue to make good use of fiscal and financial policy, the country’s top economic planner said yesterday.

However, industrial profit growth is unlikely to see a huge decline, Wang said. China’s efforts to reduce industrial overcapacity and reduce air pollution will continue to help boost commodity prices.

Profits earned by China’s State-owned industrial firms increased 30.5 percent year on year in the January-July period, slowing from a 31.5-percent growth in the first half.

The liability to asset ratio for State-owned industrial firms was at 59.4 percent by the end of July, lowest since 2016 and down 1.3 percentage points year on year.

Liabilities of industrial firms rose 6.5 percent on an annual basis as of end-July, according to the statistics bureau.

(SD-Agencies)