China’s Economy Struggles to Recover from the Q2 Slowdown

The latest economic data from China shows that the the second largest economy in the world unexpectedly slowed in July, raising concerns that a recovery from the slowdown in the second quarter, when the economy narrowly avoided a contraction, has yet to gain traction.

Weaker-than-expected July figures for industrial production and retail sales suggest the recovery process is still fragile, prompting some economists to lower their forecasts for economic growth in the third quarter from an initial 4.5% to 4%, with threats of a possible further decline. , depending on the strength of China’s exports in the coming months.

Bad economic data is also fueling fears about global economic growthalready hurt by the war in Ukraine, heavy sanctions of the western world against Russia, the reverse effect of the sanctions, and rising inflation.

China’s zero tolerance Covid policy has resulted in the most recent lockdowns of Shanghai’s commercial center as well as some other industrial areas and tourist sites, worsening conditions in the farm sector and persistently weak consumer spending have been the biggest contributors to slower economic activity in july , which warns that post-pandemic recovery is losing steam after an initial boost.

Industrial production grew by 3.8% in July, after a 3.9% expansion in June, and strongly missed the forecast for growth of 4.6%.

China’s retail sales, which only returned to growth in June after showing strong negative results in the previous three months, rose 2.7% in July compared to the year-ago period after expanding 3.1% in June and below the decline of expectations for 5. % growth.

In such an environment, the People’s Bank of China was surprised by a decrease in interest rates on key lending facilities, with many economists expecting the central bank to continue in the same way and cut its reference lending rates in the policy meeting next week.

But economists believe the scope for further easing is likely to be limited as many major central banks, led by the US Federal Reserve, have adopted an aggressive stance on raising interest rates in attempts to control soaring inflation, which would further widen the gap between the policies of the PBOC and other major central banks and increase capital outflows.

With credit demand remaining sluggish due to weak economic activity growth and inflation at a lower than expected level (July 4.2% vs. forecast 4.8%), policymakers are in a difficult position to maintain a still fragile economic recovery and limit the impact of new Covid outbreaks . this would result in lower than expected economic growth this year, with projections set at around 5.5%, likely to be lowered.

China faces another problem with the labor sector as youth unemployment remains very high (19.9% ​​in July) although the negative impact was slightly offset by a lower unemployment rate, which fell to 5.4% in July from 5.5% the previous month.

Beijing still hopes so solid fixed investments which grew 5.7% in the first seven months of this year against an expected 6.2% growth, will help balance the negative impact of other sectors and keep the economy recovering on the positive path.

Economists expect that China’s economic growth in the second half of 2022 will strongly depend on the situation with the coronavirus, property sector and exports.