China - Turning the corner, in an unbalanced way
Economic activity has started to bounce back from the lockdown slump in March/April. The rebound is led by the supply side, as strict Covid-19 policy leaves its mark on consumption. We still expect momentum to improve in 2H-22, but cut our 2022 growth forecast to 4.2% (from 4.7%).
May data confirmed our view that April would be the nadir of the contraction in activity following the broadening of lockdowns in March/April. Still, these data illustrated that this rebound is led by the supply side, with consumption and real estate lagging. We still expect momentum to pick up in 2H-22, the gradual reopening to continue and ongoing targeted fiscal support, cautious monetary easing and a relaxation of macroprudential regulation (including for real estate). Still, this recovery will be unbalanced, bumpy and less spectacular than the rebound from the Covid-19 shock in 2020. Given recent data and our changed US/Fed and eurozone/ECB views, we cut our 2022 growth forecast further, to 4.2% (from 4.7%).
China’s recovery is led by the supply side, with ongoing strict Covid-19 policy leaving its mark on consumption
The PMIs and activity data for May confirm a macroeconomic turnaround led by the supply side, reflecting an easing of the nationwide lockdown intensity and measures taken to solve bottlenecks in production and transport. Annual growth of industrial production turned positive again in May, at +0.7% yoy (April: -2.9%), with for instance the car sector showing a clear rebound. Foreign trade has also profited from normalisation on the production side, with export and import growth accelerating. However, the ongoing contraction in retail sales in May (-6.7% yoy vs -11.% in April) shows that consumption is again lagging in the recovery process. Also, investment and sales data show that the property sector needs more time to recover from the lockdown-related slump. All of this underlines that ongoing strict covid-19 policy is leaving its mark on consumption, with consumer confidence also dropping to a record low in April. Although the official unemployment rate fell back a bit to 5.9% in May (April: 6.1%), youth unemployment reached a record high of 18.4%.
Combination of ongoing strict covid-19 policy and measures to safeguard growth is keeping recovery unbalanced
The gradual reopening from the March/April lockdowns will not be without hiccups, with downside risks imminent (see our for more background on Covid-19 policy and alternative scenarios). This was illustrated by a recent re-tightening of measures in megacities such as Shanghai, Beijing and Shenzhen. While the evolving practice of “mass testing and mini lockdowns under dynamic clearing” is less disruptive to the supply side compared to what we have seen in March/April, so far it is not helping the demand side much. Beijing’s policy to safeguard growth is currently more focused on production and investment, although a small reduction in the 5-year Loan Prime Rate in May may help revive consumer demand for housing. Infrastructure investment is being ramped up by eg. giving local governments greater financing freedom, encouraging banks to increase lending, and easing financing conditions for distressed real estate companies. All in all, the hardening trade-off of maintaining strict Covid-19 policy and safeguarding growth in the run-up to the CCP summit in November is keeping China’s recovery from the lockdown slump quite unbalanced.