China’s economy slows in May, which strengthens the case for more support

  • May data point to an economic slowdown
  • Industrial production, retail growth misses expectations
  • Youth unemployment is at a record high
  • The decline in real estate investment is deepening
  • PBOC cuts key interest rates to revive demand

BEIJING, June 15 (Reuters) – China’s economy stumbled in May with industrial output and retail sales growth missing forecasts, adding to expectations that Beijing will need to do more to shore up a faltering post-pandemic recovery.

The economic upswing seen earlier this year has lost momentum in the second quarter, prompting China’s central bank to cut some key interest rates this week, with expectations of more to come.

Industrial production grew 3.5% in May from a year earlier, the National Bureau of Statistics (NBS) said on Thursday, slower than the 5.6% increase in April and slightly below a 3.6% rise expected by analysts in a Reuters – survey, as manufacturers struggle. with weak demand at home and abroad.

Retail sales – a key measure of consumer confidence – rose 12.7%, missing forecasts for 13.6% growth and slowing from April’s 18.4%.

“All the data points so far sent consistent signals that economic momentum is weakening,” said Zhiwei Zhang, president of Pinpoint Asset Management.

Data ranging from factory surveys and trade to loan growth and home sales have shown signs of weakness for the world’s second largest economy. Crude steel production increased both year-on-year and fell month-on-month in May, while daily coal production fell from April as well, NBS figures showed.

The soft amount of data has defied analysts’ expectations of a sharper pick-up, given comparisons with last year’s very weak results, when many cities were under strict covid lockdowns.

The figures also reinforce the case for more stimulus as China faces deflationary risks, rising local government debt, record youth unemployment and weakened global demand.

“Insufficient domestic demand and weak external demand could interrupt momentum in the current months, leaving China with a more gradual U-shaped recovery path in its month-on-month growth path,” said Bruce Pang, chief economist at Jones Lang LaSalle.

Introducing stimulus with large-scale policy easing would be the first step, Pang said. “But it may take two to three years to shore up a slowing economic recovery.”

Reuters graphics


China’s central bank on Thursday cut the interest rate on its one-year medium-term lending facility, the first such easing in 10 months, paving the way for a cut in benchmark prime rate (LPR) rates next week.

The yuan hit a new six-month low after the rate cut and China’s stock markets rallied, with the benchmark CSI 300 rising 0.6% and Hong Kong’s Hang Seng index rising 1.2%.

Markets are also betting on more stimulus, including measures aimed at the noisy property sector, once a key driver of growth.

While policymakers in Beijing have been cautious about deploying aggressive stimulus that could increase the risk of capital flight, analysts say more easing will be needed.

The country’s biggest banks recently cut deposit rates to ease pressure on profit margins and encourage savers to spend more.

Julian Evans-Pritchard, head of China at Capital Economics, said that while the central bank’s easing won’t make much of a difference on its own, it reveals “growing concerns among officials about the health of China’s recovery.”

He added that the second quarter looks set to be weaker than he had expected, and further policy support is likely needed to prevent the economy from entering a renewed downturn.

NBS spokesperson Fu Linghui said at a press conference that growth in the second quarter is expected to pick up due to last year’s low base effect.

However, he warned that the recovery faces challenges, including “a complicated and gloomy international environment, slow global economic recovery” and “insufficient domestic demand”.

Yi Gang, the PBOC governor, promised last week that China will make counter-cyclical policy adjustments to support the economy.

Property investment in May fell at the fastest pace since at least 2001, down 21.5% year-on-year, while growth in new home prices slowed.

The real estate sector, historically a key driver of China’s economic growth, is expected to struggle with “persistent weakness” for years, Goldman Sachs analysts said this week.

Private investment in fixed assets shrank 0.1% in the first five months, a sharp contrast to 8.4% growth in investment by government entities, suggesting weak business confidence.

Labor market pain continued with youth unemployment jumping to a record 20.8%. The nationwide survey-based unemployment remained at 5.2% in May.

Reuters graphics

Additional reporting by Albee Zhang; Editing by Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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