China’s economic activity misses estimates as a Delta outbreak threatens its recovery

All the main data missed forecasts: retail sales expanded 8.5% in July from a year earlier, lower than the 10.9% predicted by economists; industrial output increased 6.4% versus the median estimate of 7.9%; fixed-asset investment grew 10.3% in the first seven months of the year, compared with a forecast of 11.3%. The unemployment rate rose to 5.1%.

China’s slowdown adds to signs the global recovery is faltering. U.S. consumer confidence fell in early August to the lowest level in nearly a decade as Americans grew more concerned about the economy’s prospects, inflation and the recent surge in coronavirus cases. Real-time data already show Asia’s economies are taking a hit as consumers curb spending and supply chains are disrupted.

“July’s data suggest the economy is losing steam very fast,” said Raymond Yeung, chief economist for Greater China at Australia and New Zealand Banking Group. “The resurgence of delta also adds extra risk to August’s activities.”

On a two-year average basis, which strips out statistical distortions from last year’s pandemic shutdowns, the data show a notable slowdown across the board in China.

The most widespread virus outbreaks in China since last year are weighing on an economic recovery that was already starting to soften into the second half of the year. Although the absolute numbers are small compared to other nations such as the U.S., the new virus cases in China since mid-July prompted yet another round of targeted lockdowns, travel curbs and mass testing across the country.

Consumption, especially of services, is taking a knock from the targeted lockdowns. Authorities rushed to close tourist sites, call off cultural events and cancel flights during the peak holiday season to contain the virus outbreaks.

The government’s aggressive moves to achieve a goal of zero COVID-19 infections could prove economically costly. Financial institutions like Nomura Holdings Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. have already cut their growth projections for the third quarter and full year. The government has set a modest growth target of above 6% for this year.

Industrial Slowdown

Factory production faced a number of other constraints in July, including disruptions from heavy rain and floods, a continued shortage of computer chips, faltering demand and environmental curbs.

Cement output fell for a third month, car production was down a fourth straight month, and steel production plunged in July to a 15-month low, according to Bloomberg calculations, as the industry begins to make good on a pledge to reduce output below last year’s record levels to restrain emissions.

“We are seeing the stacked effect of China’s de-carbonization efforts and uncertainty from COVID and global chip shortage,” said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. “Manufacturing sector still looks promising. However, it may not be enough to lift China out of its downward slope of economic cycle.”

Adding to the economy’s woes are a slowdown in export growth, rising factory-gate prices and a real estate market that remains subdued given tighter restrictions on the property market. Local governments have also been slow to sell bonds this year, implying a moderate rollout of infrastructure spending.

“We continue to expect a notable growth slowdown in the second half as Beijing leaves little space for dialing back its unprecedented tightening measures on the property sector,” said Lu Ting, chief China economist at Nomura Holdings Inc.

Even so, Lu doesn’t expect the People’s Bank of China to cut interest rates this year, and sees a below-50% chance of another reduction this year in the amount of money banks have to keep in reserve.

China’s benchmark 10-year bond yield was unchanged at 2.88%, while futures contracts of the same tenor rose after the economic data release. China’s CSI 300 stock index moved higher after the data and was up as much as 0.6% in the morning, before dropping to be up 0.2% at 11:13 a.m. in Shanghai.

Fu Linghui, a spokesman for the National Bureau of Statistics said China will maintain a “stable recovery” in the second half of the year, with the main indicators staying “within a reasonable range.” He added that the “domestic economic recovery is still faced with many challenges, as production constraints have increased and some structural problems have become more prominent.”

Policy Action

Policy makers have signaled more targeted support for the economy as they look to cushion the recovery. At a Politburo meeting last month, where economic priorities for the second half of the year were laid out, top leaders pledged more steps to help struggling small businesses, a boost to fiscal spending and providing sufficient liquidity via monetary policy.

Economists now see the chance of more cuts to the reserve requirement ratio for banks in coming months after a surprise reduction in July. Some are even calling on the PBOC to lower interest rates, though the central bank said in its latest quarterly report that rates were at a “reasonable level” and vowed to avoid flooding the economy with stimulus.

On Monday, the central bank reduced liquidity by only rolling over 600 billion yuan ($92.7 billion) of the 700 billion yuan in 1-year loans that matured, while keeping the rate on the loans unchanged at 2.95%.