China’s economy contracts quarter on quarter, global risks darken outlook

On a quarter-on-quarter basis, China's GDP fell 2.6 per cent in the second quarter. PHOTO: AFP

BEIJING (REUTERS) -  China’s economy contracted sharply in the second quarter from the previous three months while annual growth also slowed sharply, highlighting the colossal toll on activity from widespread Covid-19 lockdowns that jolted industrial production and consumer spending.

Gross domestic product shrank 2.6 per cent in the second quarter from the previous quarter, official data showed on Friday (July 15), compared with expectations for a 1.5 per cent decline and a revised 1.4 per cent gain in the previous quarter.

On a year-on-year basis, GDP in the April to June quarter grew a tepid 0.4 per cent, missing forecasts of a 1 per cent gain, according to a Reuters poll of analysts, a sharp slowdown from 4.8 per cent in the first quarter.

For the first half of the year, GDP grew 2.5 per cent.

Full or partial lockdowns were imposed in major centres across the country in March and April, including commercial capital Shanghai.

While many of those curbs have since been lifted, and June data offered signs of improvement, analysts do not expect a rapid economic recovery. China is sticking to its tough zero-Covid-19 policy amid fresh flare-ups, the country’s property market is in a deep slump and the global outlook is darkening.

The imposition of new lockdowns in some cities and the arrival of the highly contagious BA.5 sub-variant have heightened concerns among businesses and consumers about a prolonged period of uncertainty.

China has been ramping up policy support for the economy, although analysts say the official growth target of around 5.5 per cent for this year will be hard to achieve without doing away with its strict Covid-19-zero strategy.

Some data bounce in June

Data on June activity showed that China’s industrial output grew 3.9 per cent in June from a year earlier, quickening from a 0.7 per cent rise in May, although it was weaker than a 4.1 per cent increase that analysts had forecast in a Reuters poll.

Retail sales, on the other hand, rose 3.1 per cent from a year ago in June and marked the quickest growth in four months, after the authorities lifted a two-month lockdown in Shanghai. Analysts had expected a 0 per cent increase after May’s 6.7 per cent drop.

Fixed asset investment grew 6.1 per cent in the first six months of the year from the same period a year earlier, versus a forecast 6 per cent rise and down from a 6.2 per cent jump in January to May.

The employment situation improved, with the nationwide survey-based jobless rate falling to 5.5 per cent in June from 5.9 per cent in May as the economy rebounded.

A nascent recovery in China’s capital-starved property sector is being overshadowed by a growing number of home buyers across the country halting mortgage payments until developers resume construction of presold homes.

Data on Friday showed that home prices fell 0.5 per cent from a year ago, worsening from a 0.1 per cent dip in the previous month, while growth on a monthly basis also failed to pick up.

China’s property investment fell 5.4 per cent year on year in the first half of the year, after a 4 per cent decline in the first five months.

The central bank on Wednesday pledged to keep liquidity reasonably ample and lower funding costs, foreseeing a temporary rise in the overall level of debt amid efforts to revive the economy.

It also rolled over maturing medium-term policy loans on Friday, while keeping interest rate unchanged for a sixth straight month.

Analysts believe room for the central bank to ease policy further could be limited by worries about capital outflows, as the United States Federal Reserve aggressively raises interest rates to fight soaring inflation.

China’s rising consumer prices, while not as hot as elsewhere, also may add to constraints on monetary policy easing. Many analysts expect consumer inflation to pick up and surpass 3 per cent in the coming months, but the whole-year average level will still be within the annual target of around 3 per cent.

A Reuters poll forecasts China’s growth to slow to 4 per cent in 2022, far below the official growth target of around 5.5 per cent.

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