MNI: China’s Q2 GDP Growth Pace May Disappoint On Covid Hit

The Chinese economy likely expanded less than 1% in Q2, slower than expected as the initial economic rebound starting in June may not be robust enough to offset the damage of Covid lockdowns during April and May, according to analysts.

China will unveil its Q2 GDP and a set of June economic indicators on Friday, which will give clues on how fast the economy emerged from the bottom as restrictions were eased. Economists polled by Bloomberg predict GDP accelerated 1.2% y/y in Q2, down from Q1’s 4.8%.

But some analysts from domestic research houses are looking at a slower pace around 0.5-0.8%.

Economic activities in Q2 were the weakest since a historic contraction in the first three months of 2020 when the pandemic first hit, as several major cities, especially Shanghai, almost stagnated in April and May amid lockdowns, leading to serious deviations of macro data from the normal levels, according to analysts.

Though the unexpectedly strong credit and financing data as well as still double-digit exports growth in June released earlier this week print a brighter picture of the second half. (See: MNI BRIEF: China M2 Nears 6-Yr High; Aggregate Finance Doubles; MNI BRIEF: China June Exports Beat Expectations In 17.9% Jump).

STRONG SUPPLY

A strong rebound in industrial output is seen by analysts as factories ramped up production and disruptions in supply chains and logistics eased in data to also be released on Friday.

The forward-looking official manufacturing PMI, which rose back above the breakeven 50 to 50.2 in June, indicated manufacturing activities have turned to expansion. This echoed the pickups in power consumption and the usage of blast furnaces in 247 steel mills nationwide which rose to over one-year high, according to analysts. (See: MNI: Official China PMI In Expansion, But More Stimulus Needed).

The median forecast is for industrial output to have grown 4.3% y/y in June, compared to May’s 0.7%.

WEAK CONSUMPTION

Retail sales likely rebounded from May’s 6.7% decline, and just turned positive at its best, breaking a three-month declining streak following easing restrictions and the government’s push to boost sales of cars and home appliances.

The retail sales of passenger cars reached 1.94 million in June, rising 22.6% y/y or 43.5% m/m, according to data by China Passenger Car Association. Compared with the 17% y/y decline in May, car sales had improved by about 40 percentage points, which would drive up the headline retail sales by 4 pps, wrote Zhang Yu, chief analyst of Huachuang Securities in a research note.

Catering is seen improved as well, as inner-city travel recovered with the subway passenger traffic of 29 major cities narrowed to -12% y/y in June from the previous -40%, said Zhang. She expects catering revenue to fall 8% y/y in June, narrowing from May’s 21.1% decline and lifting the headline retail sales by 1.4 pps.

Zhang predicts retail sales could exceed expectations to grow about 1% y/y, while the median forecast is looking at 0.3%.

UPLIFTED INVESTMENT

Fixed-asset investment likely held up in the first half of the year thanks to the government’s fiscal boost to push infrastructure construction, though investment in the property sector may not have bottomed out yet.

With a peak of over CNY1 trillion local government special bonds sold in June, funding for projects is guaranteed. The construction business activity index rebounded 4.4 pps to 56.6% in June, along with improved sales of excavators and heavy trucks, said Wen Bin, chief economist of Minsheng Bank.

Wen expects infrastructure investment in H1 to have accelerated to 7.5% from the 6.7% in Jan-May period, but property investment may have slid further to -4.5% from the previous -4%. Zhang agreed that property investment may even continue to decline in Q3, considering the sluggish land sales and low land prices earlier, despite a marginal recovery of home sales in big cities since June. (See: MNI: Some China Developers Desperate As Debt Peak Looms).

Both Wen and Zhang expect fixed-asset investment has risen 5.8% y/y in H1, decelerating from 6.2% in the first five months, while the median forecast is 6.0%.