August 11, 2022

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China’s economy brakes sharply in the second quarter, and global risks make the outlook bleak

China's economy brakes sharply in the second quarter, and global risks make the outlook bleak
  • China’s GDP contracted in the second quarter of the first quarter, year-on-year growth slowed sharply
  • Spreading coronavirus shutdowns slow industrial activity and demand
  • June shows a rebound in activity, but global risks cloud the outlook
  • New outbreak of COVID, Ukraine war, global price hikes pressure builds
  • Analysts expect full-year GDP growth to lag behind the government’s target of 5.5%

BEIJING (Reuters) – China’s economic growth slowed sharply in the second quarter, highlighting the massive losses in activity from the widespread shutdowns of the novel coronavirus outbreak, and pointing to continued pressure over the coming months from a bleak global outlook.

Friday’s weak data adds to fears of a global recession as policymakers raise interest rates to rein in spiraling inflation, causing more hardships for consumers and businesses around the world as they face challenges from the Ukraine war and supply chain disruptions.

Official data on Friday showed that gross domestic product in the April-June quarter grew 0.4% from a year earlier. This was 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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It was also not expecting a 1.0% gain in a Reuters poll of analysts and marks a sharp slowdown from 4.8% growth in the first quarter.

On a quarterly basis, GDP declined 2.6% in the second quarter from the previous quarter, compared to expectations for a 1.5% decline and a revised 1.4% gain in the previous quarter.

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“The Chinese economy stood on the brink of stagflation, although the worst was over from May to June. You can rule out the possibility of a recession, or two consecutive quarters of deflation,” said Toru Nishihama, chief economist. at the Dai-ichi Life Research Institute in Tokyo.

“Given the weak growth, the Chinese government is likely to implement economic stimulus measures from now on to increase its faltering growth, but the obstacles are great for the People’s Bank of China to cut interest rates further as it would boost inflation which has remained relatively low at the moment.”

Full or partial closures were imposed in major centers across the country in March and April, including the commercial capital Shanghai, which saw an annual contraction of 13.7% in gross domestic product in the second quarter. Output in the capital, Beijing, shrank 2.9% year-on-year in the same quarter.

While many of these restrictions have since been lifted, and the June data provided signs of improvement, analysts do not expect a rapid economic recovery. China is adhering to its strict policy of no coronavirus spread amid a new upsurge, the country’s real estate market is in a deep recession, and global prospects are getting bleaker.

The imposition of new lockdowns in some cities and the arrival of the highly contagious BA.5 variant has raised concerns among businesses and consumers about a prolonged period of 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 two-month low as a result of a weak GDP report.

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A goal for the whole year after reaching it

China is ramping up its political support for the economy, although analysts say the official growth target of around 5.5% for this year will be difficult to achieve without ditching its tough anti-coronavirus strategy. A Reuters poll forecast growth slowing in 2022 to 4%. Read more

Many believe the central bank’s room for further policy easing may be limited by concerns about capital outflows, as the US Federal Reserve and other economies aggressively raise interest rates to combat spiraling inflation. Read more

Analysts said that rising consumer price inflation in China, although not to the same degree as inflation in other major economies, may add to the constraints on monetary policy easing.

“We believe the markets have become overly optimistic about growth in the second half,” Nomura analysts said.

June activity data, also released on Friday, showed that China’s industrial output grew 3.9% in June from a year earlier, accelerating from a 0.7% rise in May.

Investment in fixed assets, the driver Beijing is preparing to bolster growth, grew 6.1% better-than-expected in the first six months of the year from a year earlier, compared to a 6.2% jump in the January-May period.

Retail sales also improved, rising 3.1% year-on-year in June and posting the fastest growth in 4 months, after authorities lifted a two-month lockdown in Shanghai. Analysts expected steady growth after falling 6.7% in May.

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

“Consumers still feel some uncertainty about the shutdowns, but with indications that future shutdowns will not be severe, we are optimistic that consumption will continue to recover in H2.”

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Property Concerns

However, challenges abound for consumers and businesses.

The employment situation remained fragile. The survey-based unemployment rate nationwide fell to 5.5% in June, from 5.9% in May – in line with the government’s target. But youth unemployment jumped to a record 19.3% in June.

The fragile recovery in China’s capital-starved real estate sector is under further pressure from a growing number of homebuyers across the country who are halting mortgage payments until developers resume building previously sold homes.

Friday’s data showed that housing price growth stalled in June on a monthly basis, while real estate investment contracted for a fourth month and sales continued to fall by 18.3%. Read more

Policy makers pledged to help local governments implement real estate projects on time, and plan to increase spending on infrastructure to revive the economy. However, the headwinds of growth indicate difficulty ahead.

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

This will take a massive acceleration in the second half of this year, which is unlikely.

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(Covering) Kevin Yao, Stella Keogh and Elaine Zhang – Editing by Shri Navaratnam

Our criteria: Thomson Reuters Trust Principles.