China’s economy slows in May, and stimulus is expected

  • May data adds to evidence of economic slowdown
  • Industrial production, retail sales growth misses expectations
  • The youth unemployment rate has reached an all-time high
  • Property investment slump deepens
  • The PBOC cuts key rates to revive demand, and further easing measures are seen

BEIJING, June 15 (Reuters) – China’s economy faltered in May as it missed forecasts for industrial production and retail sales growth, adding to expectations that Beijing must do more to boost its post-pandemic recovery.

The economic recovery seen earlier this year has 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 expectations for more to come.

“The post-Covid recovery appears to have run its course, the economic double dip is almost confirmed, and we see significant downside risks to consensus GDP growth forecasts of 5.5% and 4.2% in 2023 and 2024, respectively.” Nomura’s analysts said in a research note after the latest disappointing data.

Industrial production grew 3.5% in May from a year earlier, the National Bureau of Statistics (NBS) said on Thursday, slowing from a 5.6% expansion in April and below the 3.6% expected by analysts in a Reuters poll, as manufacturers struggle. With low demand both domestically and abroad.

Retail sales – a key measure of consumer confidence – rose 12.7%, missing forecasts for a 13.6% rise and down from 18.4% in April.

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“All data points have sent consistent signals that economic momentum is weakening,” said Shiwei Zhang, head of Pinpoint Asset Management.

Data from factory surveys and trade to credit growth and home sales show signs of weakness in the world’s second-largest economy. Crude steel production fell year-on-year and month-on-month in May, while daily coal production fell from April, NBS data showed.

The smooth flow of data has defied analysts’ expectations of a sharp pick-up, compared to a much weaker performance last year when many cities were under strict Covid lockdowns.

Analysts say the figures confirm the need for more stimulus as China faces deflationary risks, mounting local government debt, record youth unemployment and weakening global demand.

“Sufficient domestic demand and sluggish external demand may interrupt momentum in current months, causing China’s monthly growth path to gradually enter a U-shaped recovery path,” said Bruce Pang, chief economist at Jones Lang LaSalle.

Bong said the first step would be to introduce stimulus along with a large-scale policy easing. “But a slow economic recovery may require two to three years.”

Following the lackluster data, JP Morgan cut its forecast for China’s full-year gross domestic product (GDP) growth in 2023 to 5.5% from 5.9%. After badly missing the 2022 target, the government has set its GDP growth target for this year at around 5%.

Reuters Graphics

Central Bank Easing

China’s central bank cut the interest rate on its one-year medium-term lending facility on Thursday, the first easing in 10 months, paving the way for cuts in benchmark lending prime rates (LPR) next week. The move was expected after some short-term rate cuts earlier in the week.

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The yuan hit a fresh six-month low after the rate cut and China’s stock markets rose, with the benchmark CSI 300 (.CSI300) up 1.6% and Hong Kong’s Hang Seng Index (.HSI) up 2.2%.

Markets are betting on more stimulus, including measures targeting the property sector, once a key driver of growth.

While policymakers in Beijing have been wary of using aggressive stimulus that could raise capital flight risks, analysts say further easing is needed.

The country’s biggest banks recently cut their deposit rates to ease pressure on profit margins and encourage savers to spend more.

Julian Evans-Pritchard, China head of Capital Economics, said central bank easing would not make a difference on its own, adding that it reflected “growing concerns among officials about the health of China’s recovery”.

He said the second quarter was weaker than he had expected and that more policy support was needed to prevent the economy from entering a renewed recession.

NBS spokesperson Fu Linghui told a press conference that second-quarter growth is expected to pick up due to a lower base effect last year.

However, he warned that the recovery would face challenges including a “complicated and tough international environment, sluggish global economic recovery” and “insufficient domestic demand”.

Yi Gang, the PBOC governor, pledged last week that China would make counter-cyclical policy changes to boost the economy.

Property investment in May fell the fastest since at least 2001, down 21.5% year-on-year, while new home price growth slowed.

The property sector, historically a key driver of China’s economic activity, is expected to struggle with “continued weakness” for several years, Goldman Sachs analysts said this week.

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Private fixed asset investment shrank 0.1% in the first five months, in contrast to 8.4% growth in investment by state-owned enterprises, indicating weak business confidence.

Labor market pains Youth unemployment rises to 20.8%. The nationwide survey-based unemployment rate was 5.2% in May.

Chinese factory strikes have risen to a seven-year high and are expected to become more frequent as weak global demand forces exporters to cut workers’ wages and close factories, a rights group and economists said, further hurting consumer and business confidence.

Reuters Graphics

Additional reporting by Albee Zhang; Editing by Sam Holmes and Kim Coggle

Our Standards: Thomson Reuters Trust Principles.

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