- China’s second-quarter GDP shrank from the first quarter, year-on-year growth slowed sharply
- Widespread lockdowns due to COVID are hitting industrial activity, demand
- June shows a surge in activity, but global risks cloud the outlook
- New outbreaks of COVID, war in Ukraine, global interest rate hikes, huge pressure
- Analysts expect full-year GDP growth to fall short of the government’s target of 5.5%
BEIJING, July 15 (Reuters) – China’s economic growth slowed sharply in the second quarter, underscoring the colossal damage to activity from widespread COVID-19 lockdowns and pointing to continued pressure in coming months from a darkening global outlook.
Friday’s weak data fueled fears of a global recession as policymakers raised interest rates to curb rising inflation, piling on more hardship for consumers and businesses around the world as they grapple with the challenges of the war in Ukraine and supply chain disruptions.
Gross domestic product in the April-June quarter rose a tepid 0.4 percent from a year earlier, official data showed on Friday. It was the worst performance for the world’s second-largest economy since the data series began in 1992, excluding the 6.9% contraction in the first quarter of 2020 due to the initial shock of COVID.
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It also missed the 1.0 percent growth forecast in a Reuters poll of analysts and posted a sharp deceleration from 4.8 percent growth in the first quarter.
On a quarterly basis, GDP fell 2.6% in the second quarter from the previous quarter, compared with expectations for a 1.5% decline and a revised 1.4% increase in the previous quarter.
“China’s economy is on the brink of stagflation, although the worst is over by the May-June period. You can rule out a recession or two consecutive quarters of contraction,” said Toru Nishihama, chief economist at the Dai-ichi Institute for Life Research in Tokyo.
“Given the subdued growth, China’s government is likely to roll out economic stimulus measures from now on to boost its slowing growth, but the odds are high for the PBOC to cut interest rates further, as that would fuel inflation, which is currently is kept relatively low. “
Full or partial lockdowns were imposed in major centers across the country in March and April, including the commercial capital Shanghai, which saw an annual GDP contraction of 13.7% in the second quarter. Production in the capital, Beijing, shrank by 2.9% year-on-year in the same quarter.
While many of those restrictions have since been lifted and data from June offered signs of improvement, analysts do not expect a quick economic recovery. China is sticking to its tough zero-covid policy amid new flare-ups, the country’s property market in deep decline and the global outlook darkening.
The imposition of new lockdowns in some cities and the emergence of the highly contagious BA.5 variant have heightened concerns among businesses and consumers about a prolonged period of uncertainty. Read more
For the first half of the year, GDP grew by 2.5% compared to a year earlier.
WHOLE YEAR GOAL OUT OF ACHIEVEMENT
China is ramping up policy support for the economy, although analysts say the official growth target of around 5.5 percent this year will be hard to achieve without undoing its strict zero-Covid strategy. A Reuters poll predicts growth will slow to 4% in 2022. Read more
Many believe the central bank’s ability to further ease policy may be limited by concerns about capital outflows as the US Federal Reserve and other economies aggressively raise interest rates to combat rising inflation. Read more
Rising consumer inflation in China, though not as hot as in other major economies, could also add constraints to easing monetary policy, analysts said.
“We believe markets have become overly optimistic about growth in the second half,” Nomura analysts said.
June activity data, also released on Friday, showed China’s industrial production rose 3.9 percent in June from a year earlier, accelerating from a 0.7 percent gain in May.
Fixed asset investment, the engine Beijing relies on to support growth, rose a better-than-expected 6.1 percent in the first six months of the year from a year earlier, compared with a 6.2 percent jump in January-May .
Retail sales also improved 3.1 percent from a year ago in June and posted the fastest growth in four months after authorities lifted a two-month lockdown in Shanghai. Analysts had expected steady growth after a 6.7% drop in May.
“Retail growth shows that lockdown is the main stop to consumption,” said Jacob Cook, chief executive of WPIC Marketing + Technologies, in Beijing.
“Consumers still harbor some uncertainty about lockdowns, but with indications that future lockdowns will not be as severe, we are optimistic that consumption will continue to recover in H2.”
HARD SLIPPING
However, there are plenty of challenges for consumers and businesses.
The employment situation remains unstable. The unemployment rate, based on a national survey, fell to 5.5% in June from 5.9% in May – in line with the government’s target. But youth unemployment rose to a record 19.3% in June.
The shaky recovery of China’s capital-strapped property sector has come under added pressure from a growing number of homebuyers across the country who are suspending mortgage payments until developers resume construction on pre-sold homes, further undermining buyer confidence in a downturn on the market.
Friday’s data showed that house price growth stalled in June on a month-on-month basis, while property investment contracted for a fourth consecutive month and sales extended their decline by another 18.3%. Read more
Politicians have pledged to help local governments deliver property projects on time and plan to boost infrastructure spending to revive the economy. Yet the headwinds to growth mean hard work.
“Even with some crunching of the numbers, it’s hard to see how the government’s target of ‘around 5.5%’ growth this year can be met,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
“That would require a huge acceleration in the second half of this year, which is unlikely.”
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Reporting by Kevin Yao, Stella Qiu and Ellen Zhang Editing by Sri Navaratnam
Our standards: The Thomson Reuters Trust Principles.
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