China’s economy brakes hard in Q2, global risks cloud outlook

  • China’s Q2 GDP shrinks from Q1, Y/Y growth slows sharply
  • Widespread COVID lockdowns are hammering industrial activity, demand
  • June shows a bounce in activity, but global risks cloud the outlook
  • New COVID outbreaks, war in Ukraine, global rates raise focal pressure
  • Analysts expect full-year GDP growth to miss the government’s target of 5.5%

BEIJING, July 15 (Reuters) – China’s economic growth slowed sharply in the second quarter, highlighting the heavy toll of widespread Covid lockdowns and pointing to continued pressure in the coming months from a bleak global outlook.

Friday’s weak data added to fears of a global recession as policymakers raise interest rates to curb rising inflation, with the challenges of the Ukraine war and supply chain disruptions heaping more strain on consumers and businesses around the world.

Gross domestic product fell 0.4% in the April-June quarter from a year earlier, official data showed on Friday. This is the worst showing for the world’s second-largest economy since the data series began in 1992, barring a 6.9% contraction in the first quarter of 2020 due to the initial Covid shock.

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That missed the 1.0% gain forecast in a Reuters poll of analysts and marked a sharp slowdown from 4.8% 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 in the previous quarter and a revised 1.4% gain.

“China’s economy is on the brink of falling into stagnation, although the worst of the May-June period is over. You can rule out the possibility of a recession or two straight quarters of contraction,” said chief economist Toru Nishihama. at Dai-ichi Life Research Institute, Tokyo.

“In terms of restrained growth, China’s government is likely to deploy economic stimulus measures to revive its sluggish growth, but the PBOC is more constrained to cut interest rates further as inflation, which is currently kept relatively low, is fanned.”

Full or partial lockdowns were imposed in March and April in major centers across the country, including the commercial capital Shanghai, which saw gross domestic product shrink by 13.7% year-on-year in the second quarter. Production in the capital Beijing shrank 2.9% year-on-year in the same quarter.

Although many of those barriers have been lifted and the June data provided signs of improvement, analysts do not expect a quick economic recovery. China is sticking to its strict zero-covid policy amid new outbreaks, the country’s property market is in deep decline and the global outlook is darkening.

New lockdowns imposed in some cities and the arrival of the highly contagious BA.5 variant have raised concerns among businesses and consumers about the long-term uncertainty. read more

In the first half of the year, GDP grew by 2.5% over the previous year.

Chinese stocks (.CSI300) It rose briefly before declining, while the yuan fell to a 2-month low on a weak GDP report.

Beyond achieving the full-year target

China is ramping up policy support for the economy, although analysts say this year’s official growth target of 5.5% will be difficult to achieve without scrapping its strict zero-covid strategy. A Reuters poll forecast 2022 growth to slow to 4%. read more

As the US Federal Reserve and other economies aggressively raise interest rates to combat rising inflation, many believe the central bank’s room for further easing may be limited by concerns about capital outflows. read more

China’s rising consumer inflation, although not as hot as other major economies, could add to the obstacles to easing monetary policy, analysts said.

“We believe markets are over-optimistic about growth in H2,” Nomura analysts said.

Data on June activity released on Friday showed China’s industrial production grew 3.9% in June, up from 0.7% in May.

Fixed-asset-investment, one driver Beijing expects to boost growth, rose a better-than-expected 6.1% in the first six months of the year, compared with a 6.2% advance in January-May.

Retail sales also improved, rising 3.1% year-on-year in June, marking the fastest growth in four months after authorities lifted a two-month lockdown in Shanghai. Analysts had expected flat growth after a 6.7% drop in May.

“Retail growth indicates that lockdowns have been a primary drag on consumption,” said Jacob Cook, CEO of WPIC Marketing + Technologies in Beijing.

“Consumers still have some uncertainty about the lockdowns, but with signs that future lockdowns will not be severe, we believe consumption will continue to recover in H2.”

Fear of property

However, challenges for consumers and businesses abound.

Employment conditions remained tenuous. The nationwide survey-based unemployment rate stood at 5.5% in June, up from 5.9% in May – in line with the government’s target. But youth unemployment rose to 19.3% in June.

A shaky recovery in China’s capital-starved property sector has been further pressured by a growing number of homebuyers across the country, with developers suspending mortgage payments until they rebuild pre-sold homes.

Friday’s data showed that growth in house prices stagnated on a monthly basis in June, while property investment contracted for a fourth straight month and sales extended their decline to a further 18.3%. read more

Policymakers have pledged to help local governments deliver property projects on time, and plan to increase spending on infrastructure to revive the economy. Still, headwinds to growth suggest a tough grind ahead.

“Even with some massage of the figures, it’s hard to see how the government’s target of ‘around 5.5%’ growth this year can be achieved,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“It will take a big acceleration in the second half of the year, which is unlikely.”

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Sri Navaratnam Editing by Kevin Yao, Stella Qi and Ellen Zhang

Our Standards: Thomson Reuters Trust Principles.

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