Consumption in China

China - Consumption

Economy records weakest growth reading since Q1 2020 in Q2

GDP growth waned to 0.4% year on year in the second quarter, from 4.8% in the first quarter. Q2's reading marked the worst result since Q1 2020, and came in below market expectations of 1.0% growth. On a seasonally-adjusted quarter-on-quarter basis, GDP declined 2.6% in Q2, contrasting the previous period's 1.4% expansion and also undershooting market expectations. Lockdown restrictions across large swathes of the country hit private spending, logistics and factory activity in the second quarter.

The services sector contracted 0.4% annually in Q2, contrasting the first quarter's 4.0% increase. In addition, the industrial sector lost steam, growing 0.9% in Q2 (Q1: +5.8% yoy). Agricultural sector growth moderated to 4.4% in Q2, from 6.0% in the previous quarter.

More positively, economic data for June pointed to a recovery as Covid-19 restrictions were eased towards the end of the quarter. This recovery will likely continue in Q3, although fresh Covid-19 restrictions are a significant downside risk.

On the Q3 outlook, analysts at Nomura said:

“We remain cautious on growth outlook in H2, as the spread of the much more infectious Omicron sub-variant across the country could trigger another round of widespread lockdowns and a likely synchronized global slowdown could eventually hit the export sector. A rise in the unemployment rate among the 16-24 year-old cohort to 19.3% in June from 18.4% in May also suggests aggregate demand remains weak.”

Analysts at Goldman Sachs were similarly downbeat:

“June data mostly surprised to the upside. However, the strong sequential improvement may not continue in July given the temporary boosts in June (e.g., pent-up demand for auto and property sales after the end of lockdown) and the resurfacing local Covid outbreaks. The sector that we think is likely to continue to outperform is government-led infrastructure investment.”

The Consensus is for GDP to expand 4.4% in 2022, which is down 0.3 percentage points from last month’s estimate. In 2023, the panel sees growth at 5.2%.