China industrial output growth weakest in 17 years

BEIJING • China posted the weakest industrial output growth since 2002 along with slumping retail sales last month, as a cyclical slowdown and trade tensions add to the case to roll out more stimulus.

Industrial output rose 4.8 per cent last month from a year earlier. This was down from 6.3 per cent in June. Retail sales expanded 7.6 per cent and fixed-asset investment slowed to 5.7 per cent in the first seven months.

While some seasonal effects likely compressed the data, all results were lower than forecast by economists in a Bloomberg survey.

The output data, coupled with weak credit demand in the month, signal that the world's second-largest economy is still struggling to stabilise.

A partial delay of US President Donald Trump's next tranche of tariffs is cheering markets, but adds little in the way of certainty for export companies already reeling from the year-long stand-off.

"The economy is facing strong headwinds and decelerating," said Mr Gene Ma, chief China economist at the Institute of International Finance in Washington.

"More targeted monetary and credit easing are needed. We expect some sort of interest rate cut in the fall."

Manufacturing output slowed to the weakest increase since at least 2013, while infrastructure investment growth, a key pillar of the government's stimulus strategy, weakened to 3.8 per cent.

While the tariff war is accelerating the shift of China's economy away from factories and towards services and retail, the July data showed declining sentiment there too.

Retail sales continue to be depressed by the ongoing contraction in auto sales as buyers in the world's largest car market scale back.

Last month, China put in place an upgrade in emission standards in areas that count for over 60 per cent of national auto sales.

The earlier-than-expected switch weighed on automakers, as consumers postponed purchases while discounts of up to 50 per cent offered by automakers and sellers trying to clear inventory further undermined companies' profitability.

Even excluding auto sales, retail sales growth was weaker than the year-to-date average, according to the National Bureau of Statistics. The pace slowed to 8.8 per cent last month from an average of 9.2 per cent this year.

So far, policymakers have relied on a mix of tax cuts to spur spending, and targeted monetary incentives for banks to lend to businesses.

That has not been enough to arrest the slowdown, and economists are beginning to call for more aggressive measures, even in the face of rising debt and persistent financial stability risks.

There is little evidence that the trade war with the United States will reach resolution soon, even as Mr Trump on Tuesday signalled "progress" in a call with negotiators from the two countries.

The US has delayed the imposition of new tariffs on a wide variety of consumer products including toys and laptops until December.

"The top three cyclical drivers, which are exports, infrastructure spending and property investment, are all slowing," said Mr Larry Hu, head of China economics at Macquarie Securities in Hong Kong.

"More liquidity easing measures such as a reserve-ratio cut is likely in the near term, but they are not enough to turn the economy around. The economy would face more headwinds in the coming months."

The central bank has tweaked the method to evaluate banks' lending, hoping more credit will flow to manufacturers and small firms, and cutting the amount of money some banks park at the central bank.

In addition, a revamp to the current interest rate framework is seen as a method to lower borrowing costs.

For now, policymakers are not signalling that a cut to the economy-wide benchmark interest rate is on the cards.

The surveyed jobless rate rose last month to 5.3 per cent from 5.1 per cent the previous month, a development the National Bureau of Statistics said was due to recent graduates hitting the labour market.

"July's activity data was woeful," said Ms Katrina Ell, an economist with Moody's Analytics in Sydney.

"It is a product of softness on both the demand and supply side. In a weakened and cautious economic environment, easier credit conditions aren't being exuberantly adopted."

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A version of this article appeared in the print edition of The Straits Times on August 15, 2019, with the headline 'China industrial output growth weakest in 17 years'. Print Edition | Subscribe