[1/2] A worker wearing a face mask works on a production line to make a steel rim for bicycles at a factory, as the country has been hit by the novel coronavirus outbreak, in Hangzhou, Zhejiang Province, China, March 2, 2020. China Daily via REUTERS/File Photo
BEIJING, June 15 (Reuters) – China’s economy faltered in May as industrial output and retail sales growth missed expectations, adding to expectations that Beijing will need to do more to support a fragile post-pandemic recovery.
The economic recovery seen earlier this year lost momentum in the second quarter, prompting China’s central bank to cut some key interest rates this week for the first time in nearly a year, with more expected to come.
“The post-Covid recovery appears to have run its course, a double economic downturn is almost certain, and we now see significant downside risks to our below-consensus GDP growth forecasts of 5.5% and 4.2% for 2023 and 2024, respectively.” Nomura analysts said in a research note after the recent disappointing data.
The National Bureau of Statistics said Thursday that industrial output grew 3.5% in May from a year earlier, slowing from a 5.6% expansion in April and just under the 3.6% increase expected by analysts in a Reuters poll, as manufacturers struggled. With weak demand at home and abroad.
Retail sales – a key measure of consumer confidence – rose 12.7%, missing expectations for growth of 13.6% and slowing from 18.4% in April.
“All the data points so far have sent consistent signals that economic momentum is weakening,” said Qiu Zhang, president of Pinpoint Asset Management.
Data ranging from factory and trade surveys to loan growth and home sales showed signs of weakness in the world’s second largest economy. Crude steel production extended both year-on-year and month-on-month in May, while daily coal production from April also declined, the NBS figures showed.
The soft flow of data has defied analysts’ expectations for a sharper rebound, given comparisons to last year’s very poor performance, when many cities were under strict coronavirus lockdowns.
Analysts say the numbers also reinforce the case for the need for more stimulus as China faces deflationary risks, mounting local government debt, recording youth unemployment and weak global demand.
“Inadequate domestic demand and sluggish external demand could derail momentum in the current months, leaving China on a gradual U-shaped recovery path on its monthly growth trajectory,” said Bruce Pang, chief economist at Jones Lang LaSalle.
Pang said introducing stimulus along with broad easing of policy would be the first step. “But it may need two to three years to support a slowing economic recovery.”
After the downbeat data, JPMorgan trimmed its forecast for Chinese GDP growth for 2023 to 5.5% from 5.9%. The government has set a modest GDP growth target of around 5% for this year, after sorely missing the 2022 target.
Central bank facilitation
China’s central bank on Thursday lowered the interest rate on its one-year medium-term lending facility, the first such easing in 10 months, paving the way for a cut in the key lending rate (LPR) next week. The move was expected after it cut some short-term interest rates earlier in the week.
The yuan hit a six-month low after the rate cut and Chinese stock markets rallied, with the CSI 300 (.CSI300) up 1.6% and Hong Kong’s Hang Seng (.HSI) up 2.2%.
Markets are also betting on more stimulus, including measures targeting the ailing real estate sector, once a major driver of growth.
While policymakers in Beijing have been cautious about deploying strong stimulus that could increase the risk of capital flight, analysts say more easing is needed.
The country’s largest banks recently cut deposit rates to ease pressure on profit margins and encourage savers to spend more.
Julian Evans-Pritchard, head of China at Capital Economics, said that while central bank easing on its own wouldn’t make much difference, it did reveal “growing concerns among officials about the health of China’s recovery.”
He added that the second quarter is shaping up to be weaker than expected and more political support is likely to be needed to prevent the economy from entering a renewed downturn.
NBS spokesperson Fu Lingwei told a press conference that growth is expected to pick up in the second quarter due to last year’s low base effect.
But he warned that the recovery faces challenges including a “complex and dismal international environment, slowing global economic recovery” and “insufficient domestic demand”.
Yi Gang, governor of the People’s Bank of China, pledged last week that China would make counter-cyclical policy adjustments to support the economy.
Real estate investment fell in May at the fastest pace since at least 2001, down 21.5% year over year, while new home price growth slowed.
Goldman Sachs analysts said this week that the real estate sector, which is a key driver of Chinese economic activity, is expected to struggle with “continued weakness” for years.
Private investment in fixed assets shrank by 0.1% in the first five months, in sharp contrast to investment growth by government entities of 8.4%, indicating weaker business confidence.
Labor market pain continued as youth unemployment jumped to a record 20.8%. The survey-based nationwide unemployment rate remained at 5.2% in May.
Chinese factory strikes have jumped to a seven-year high and are expected to become more frequent, a rights group and economists said, as weak global demand forces exporters to cut workers’ salaries and close factories, further hurting consumer and business confidence.
Additional reporting by Albie Zhang. Editing by Sam Holmes and Kim Coghill
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