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China’s economic growth slowed sharply in the second quarter of the year mainly due to the impact of the Covid outbreaks. Recovery in industrial production, investment and consumption were seen in June amid easing lockdown measures, though weakness in the real estate sector continued to weigh on the economy.
The country’s GDP grew 0.4% in the quarter from a year earlier, according to data released by the National Bureau of Statistics (NBS) on Friday, marking the weakest since the second quarter of 2020 and slowing sharply from the 4.8% in the first quarter. That missed expectations for 1% growth in a Reuters’ survey.
The weakness was mainly due to the Covid-19 outbreaks that hit several regions including the commercial hub of Shanghai and the industrial hub of Jilin province in Northeast China, said Wu Ge, chief economist at Changjiang Securities.
Notably, the country’s exports, consumption and investment in June were all stronger than market expectations and industrial output also improved, indicating acceleration of economic recovery.
Industrial output grew 3.9% in June from a year earlier, largely in line with market expectations, and picking up from 0.7% gain in May, showed the data.
The pickup was mainly driven by the recovery in equipment manufacturing industry, in particular the recover in the automobile manufacturing industry, said Fu Linhui, spokesperson of the NBS.
The auto industry posted a strong performance last month, with output growing by 16.2% on year, ending a three-month falling streak, driven by implementation of a series of stimulus measures to boost auto sales and the rapid growth of new energy vehicle exports, said Zhong Zhengsheng, chief economist at Ping An Securities.
However, industries including drug-making, textile, non-metal minerals and agricultural goods processing dragged the overall industrial output growth, Zhong said.
Retail sales grew 3.1% in June from a year ago, improving from 6.7% drop in the month before and returning to growth for the first time since March, showed the data. On a month-on-month basis, retail sales rose 0.53% in June, versus 0.03% gain in May.
Due to increase outdoor activities, spending on services recovered, with the drop in catering revenue narrowing by 17.1 percentage points to 4%, said Fu.
Consumption in regions hit hard by the epidemic recovered substantially, with retail sales of physical goods in Shanghai down 2.1%, narrowing by 42 percentage points from the prior month, and that in Jilin province rising by 5.5%, improving by 7 percentage points, said Fu.
Notably, auto consumption grew 13.9% in June, improving by 29.9 percentage points from May, showed the data, indicating the recovery in auto supply chain and the effect of a new round of stimulus measures.
Fixed asset investment grew 6.1% in January – June from a year ago, slowing by 0.1 percentage points from the first five months of the year.
In June alone, fixed-asset investment grew 5.8% from a year ago, picking up by 1.1 percentage points from May, according to calculations by Nomura Securities and Citic Securities based on NBS data.
According to Zhong Zhengsheng’s calculations, China’s infrastructure investment grew by 12% in June from a year ago, accelerating by 4 percentage points.
Since June, the State Council, China’s cabinet, has allocated 800 billion yuan lending quota to policy banks and told them to issue 300 billion yuan of financial bonds to support infrastructure projects.
Fixed-asset investment in the manufacturing sector grew by 9.9% on year in June, compared to 7.7% growth in May, according to Zhong.
Real estate investment became a main drag. Citic Securities said that real estate investment fell 9.4% in June from a year ago, weakening by 1.6 percentage points from the month before.
Looking ahead, Lu Ting, chief China economist at Nomura Securities, maintains a cautious attitude towards economic growth in the second half of the year.
The more transmissible variant of Omicron may cause another round of large-scale lockdowns, homebuyers’ refusal to pay mortgages may bring the real estate sector to a vicious cycle and a global economic slowdown will likely dampen China’s exports, said Lu.
Although the central government has stepped up credit support to infrastructure projects, the rebound in infrastructure investment was moderate as local governments’ fiscal condition weakens due to slumping land sales revenue, Lu added.
While the slowdown in the first half of the year was mainly attributable to the Covid outbreaks, non-epidemic factors should not be ignored, said Li Xunlei.
In the second half, the two weaker factors – real estate investment and consumption – should be closely watched and in particular, debt defaults by property developers and mortgage defaults by some homebuyers, said Li.