China’s economy shrank sharply in the second quarter, and global risks make the outlook grim

People look at a shop window, outside a shopping mall in Beijing, China, July 13, 2022. REUTERS/Thomas Peter

BEIJING (Reuters) – China’s economy contracted sharply in the second quarter, highlighting massive losses in activity from widespread coronavirus lockdowns and pointing to continued pressure over the coming months from a bleak global growth outlook.

Friday’s data comes at a time of fears of a global recession as policymakers raise interest rates to curb 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 showed gross domestic product fell 2.6% in the second quarter from the previous quarter, compared with expectations for a 1.5% decline and a revised 1.4% gain in the previous quarter.

On an annual basis, gross domestic product in the April-June quarter grew 0.4 percent, missing expectations for a 1.0 percent increase, according to a Reuters poll of analysts, a sharp slowdown from 4.8 percent in the first quarter.

In the first half of the year, GDP grew by 2.5%, well below the government’s target of 5.5% for this year.

“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 a 13.7% annual contraction in gross domestic product in the most recent 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

Do you bounce in June temporarily?

Analysts believe the room for the central bank to loosen policy further may be limited by concerns about capital outflows, as the US Federal Reserve and other economies aggressively raise interest rates to fight high inflation. Read more

And rising consumer prices in China, though not as high as elsewhere, may also increase restrictions on monetary easing.

A Reuters poll forecast China’s growth would slow to 4.0% in 2022, well below the official growth target of around 5.5%.

June activity data, also released on Friday, showed that Chinese industrial output grew 3.9% in June from a year earlier, accelerating from a 0.7% rise in May, although less than expectations for a 4.1% increase in a Reuters poll.

On the other hand, retail sales rose 3.1% from a year ago in June and recorded the fastest growth in 4 months, after authorities lifted a two-month lockdown in Shanghai. Analysts had expected a 0% increase after May’s 6.7% drop.

“Retail growth suggests that lockdowns were the main drag on consumption, with demand clearly rebounding once Shanghai and other major cities emerged from lockdown at the end of May,” said Jacob Cook, CEO of WPIC Marketing + Technologies 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.”

Fixed-asset investment grew 6.1% in the first six months of the year from the same period a year earlier, versus an expected 6.0% rise and downturn from a 6.2% jump in the January-May period.

The employment situation remained fragile, with the nationwide unemployment rate falling to 5.5% in June from 5.9% in May as the economy recovered. However, the youth unemployment rate was 19.3% in June, up from 18.4% in May.

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 home prices fell 0.5% from a year ago, exacerbated by a 0.1% decline the previous month, while month-on-month growth also failed to pick up. Read more

Reuters calculations showed that real estate investment fell 9.4 percent in June, exacerbated by a 7.8 percent decline in May, while property sales extended their decline by another 18.3 percent last month.

“Even with some of the huge numbers, it’s hard to see how the government’s target of ‘about 5.5%’ growth this year can be met,” said analysts at Capital Economics.

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

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

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