China economy returned to growth last quarter as virus eased

The Chinese economy returned to growth in the second quarter, marking an important milestone in the global struggle to recover from the Covid- 19 pandemic ( see chart).

China’s GDP expanded 3.2% in the three months to June from a year ago, reversing a 6.8% decline in the first quarter and beating the median forecast of 2.4%. In the first half however, output is still down 1.6% on the same period in 2019.

“The recovery in 2Q is strong, but also highly uneven” as the supply recovery is stronger than demand, and investment is stronger than consumption, according to Larry Hu, chief China economist at Macquarie Bank. “Looking ahead, while the growth momentum would slow inevitably, GDP growth could rebound to around 5% on year in the second half” of this year, he said.

The data, released on July 16, showed the recovery is still largely industry–driven, while consumer sentiment is weaker than expected. A raft of measures have been rolled out since the pandemic to shore up the economy, including tax and fee cuts, cheaper loans, and increased fiscal spending. Stimulus has still fallen far short of the policies offered in developed economies, out of concern for debt build– up and financial stability.

“China’s economy has gradually overcome the negative impact brought by the virus in the first half, showing recovery momentum,” said Liu Aihua, China’s National Bureau of Statistics spokesperson. “The recovery of the domestic economic recovery still faces pressure amid rising external challenges, as the coronavirus continues to impact the global economy,” he said.

A major headwind to the recovery is the level of unemployment created by the collapse in manufacturing in the first quarter. The surveyed unemployment rate does not capture the full impact, and tens of millions may still be out of work due to the pandemic.

Policy makers are also signalling that monetary and fiscal policy will not become much more supportive, as long as credit growth continues its upward trend.

“Not out of the woods,” is how Helen Qiao, Bank of America Merrill Lynch’s chief economist for Greater China, described the numbers. She told Bloomberg Television that retail sales are clearly lagging the recovery in other parts of the economy.

“People still hold a fear against going out and travelling,” and the service sector is continuing to feel pain, she added. —