Macroscope | China’s economy seems to have peaked for the year. Is a rapid slowdown on the cards?
- Major industrial activity indicators in May were disappointing and consumption recovery seems to be fizzling out
- Bad news on the growth front is good news for the policy outlook, however, with monetary tightening likely to be gradual
As the first economy to emerge from the Covid-19 crisis, China seems to have moved beyond the initial snap-back phase. However, there are signs that the early momentum could be fading.
The recent weakness is mainly concentrated on the domestic demand side. Some major activity indicators in May, including industrial production, fixed-asset investment and retail sales, were all surprisingly disappointing.
Growth of both infrastructure and property investment softened last month, probably reflecting the impact of tighter policies on implicit local government debt and the property sector.
At the same time, China’s consumption recovery seems to be fizzling out. After a strong rebound in March, retail sales growth lost steam in April and May. In particular, the recovery in services consumption remained a laggard. For example, the annual average growth in catering sales was 1.4 per cent in May, notably below the pre-virus trend of over 9 per cent growth in 2019.
The figures tells us that China’s growth peak has certainly passed. However, the slowdown is likely to be modest for the rest of the year.
Given that China is very connected to the global trade cycle, it should continue to ride the export recovery amid firm external demand.
