China’s economy slowed unexpectedly in July as factory and retail activity came under pressure from Beijing’s zero-Covid policy and a housing crisis, while the central bank surprised markets by cutting interest rates to stimulate demand.
Industrial production rose 3.8% year on year in July, down slightly from 3.9% in June, data from the National Bureau of Statistics (NBS) showed. This contrasts with a 4.6% increase expected by analysts in a Portal poll.
Retail sales, which only turned positive in June, rose 2.7% year-on-year, missing analysts’ forecast for 5% growth and below the 3.1% growth recorded in June.
The world’s second-largest economy narrowly escaped a contraction in the June quarter, hampered by the lockdown in the commercial hub of Shanghai, a deepening downturn in the housing market and continued weakness in consumer spending.
However, there are many risks to growth as many Chinese cities, including manufacturing hubs and popular tourist spots, imposed lockdown measures in July after new outbreaks of the more transmissible Omicron variant were detected.
“The risk of stagflation in the global economy is rising and the basis for a domestic economic recovery is not yet solid,” the NBS warned in a statement.
The housing sector, further shaken by a mortgage boycott that weighed on buyer sentiment, deteriorated in July. Home investment fell 12.3% in July, the fastest rate this year, while the fall in new sales deepened to 28.9%.
Chinese politicians are trying to strike a balance to prop up a fragile recovery and stamp out emerging Covid clusters, with the economy expected to exceed its official growth target – which is set at around 5.5% – for the first time this year will be missed since 2015.
“All economic data disappointed in July, with the exception of exports. Credit demand from the real economy remained weak, suggesting a cautious outlook for the coming months,” said Nie Wen, a Shanghai-based economist at Hwabao Trust, adding that Covid outbreaks and July’s heatwaves weighed on activity.
“Now it’s looking increasingly difficult to even achieve the 5-5.5% growth in the second half of the year.”
The employment situation remained fragile. The unemployment rate, based on nationwide surveys, fell slightly to 5.4% in July from 5.5% in June, although youth unemployment remained stubbornly high, reaching a record 19.9% in July.
The central bank unexpectedly cut interest rates on key lending facilities on Monday for the second time this year in a bid to boost growth. New yuan lending fell more-than-expected in July as businesses and consumers remained wary of borrowing, data on Friday showed.
Wang Jun, an economist at Zhongyuan Bank, believes authorities will focus on implementing existing policies rather than introducing aggressive new stimulus.
“We now face a typical liquidity trap problem. No matter how loose the credit supply, businesses and consumers are wary of taking on more debt,” Wang said. “Some of them are now even prepaying their debts. This could herald a recession.”
Fixed investment, which Beijing had hoped would spur growth in the second half of the year as exports slow, grew 5.7% year-on-year in the first seven months of the year, versus a forecast increase of 6.2% % and a decrease of 6.1%. Jump in January-June.