The Chinese economy is slowing in May, which confirms the case for more support

  • May data indicates an economic slowdown
  • Industrial output and retail sales growth miss expectations
  • The youth unemployment rate is at a record high
  • Real estate investment decline deepened
  • The People’s Bank of China cut key interest rates to revive demand

BEIJING, June 15 (Reuters) – China’s economy faltered in May as industrial output and retail sales growth missed expectations, adding to expectations that Beijing will need to do more to support a fragile post-pandemic recovery.

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

Industrial output grew 3.5% in May from a year earlier, the National Bureau of Statistics said Thursday, slower than the 5.6% expansion in April and slightly less than the 3.6% increase analysts had expected in a Reuters poll, as manufacturers struggled. With weak demand at home and abroad.

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

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

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

The smooth flow of data has defied analyst expectations for a sharper pick, given comparisons to last year’s very poor performance, when many cities were under strict coronavirus lockdowns.

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The figures also bolster the case for more stimulus as China faces deflationary risks, mounting local government debt, recording youth unemployment, and weak global demand.

“Inadequate domestic demand and sluggish external demand could derail momentum in the current months, leaving China on a gradual U-shaped recovery path on its monthly growth trajectory,” said Bruce Pang, chief economist at Jones Lang LaSalle.

Pang said introducing stimulus along with broad easing of policy would be the first step. “But it may need two to three years to support a slowing economic recovery.”

Reuters graphics

Central bank facilitation

China’s central bank on Thursday lowered 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 the key lending rate (LPR) next week.

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

Markets are also betting on more stimulus, including measures targeting the ailing real estate sector, once a major driver of growth.

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

The country’s largest 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 central bank easing on its own wouldn’t make much difference, it did reveal “growing concerns among officials about the health of China’s recovery.”

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He added that the second quarter is shaping up to be weaker than expected and more political support is likely to be needed to prevent the economy from entering a renewed downturn.

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

But he warned that the recovery faces challenges including a “complex and dismal international environment, slowing global economic recovery” and “insufficient domestic demand”.

Yi Gang, governor of the People’s Bank of China, vowed last week that China would Countercyclical policy adjustments to support the economy.

Real estate investment fell in May at the fastest pace since at least 2001, down 21.5% year over year, while new home price growth slowed.

Goldman Sachs analysts said this week that the real estate sector, a historically key driver of Chinese economic growth, is expected to struggle with “continued weakness” for years.

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

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

Reuters graphics

Additional reporting by Albie Zhang. Editing by Sam Holmes

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