- We expect a soft 0.9% GDP print for Q2 due to torpid consumption
- Rising unemployment and a fading export boom point to a weak recovery ahead
- The Federal Reserve’s quickening hike pace limits the PBOC’s room to loosen
- Implications to our forecast: 2022 real GDP forecast is revised downward to 4.2% from 4.8%
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GDP is projected to decelerate to 0.9% YOY in 2Q from 4.8% in 1Q. Pandemic outbreaks and lockdowns wreaked havoc on major activities in the second quarter. Retail sales fell 6.7% YOY in May after slumping 11.1% in April. While June figures are likely to improve sequentially thanks to reduced containment disruptions, year-on-year retail contraction may persist foretold by weak 618 mid-year sales. Partly offsetting the consumption drag was a rise in fixed asset investment. Construction PMI expanded due to infrastructure stimulus. On the production side, high frequency data such as oil refinery run rate suggests industrial activities strengthened moderately in June. Supply chain snarls are also on the mend due to normalization of inter-provincial logistics. Production uptick, easing port congestions and global commodity price gains drove headline exports higher. Net exports remained a growth contributor in 2Q due to subdued import demand.
The worst of the downturn is over. But recovery in 2H is unlikely to be too strong. Anemic consumption remains the most daunting challenge owing to labor market strain because sporadic lockdowns have resulted in pay cuts and a hiring freeze. Whereas average per capita income growth over the five years preceding the pandemic was 6.7%, it had fallen to 5.1% in 1Q. Working hours in April-May also remained well below pre-omicron levels. Precautionary savings are on the rise as evidenced by household deposits surging RMB7.86tn between January-May, up 50.6% YOY.
Falling property prices are another concern. New home prices in 70 cities dropped for a ninth month in May despite a month-on-month improvement in residential sales. The mantra of “houses are for the living, not for speculation” signals Beijing’s determination to prevent property prices from surging too rapidly. Chinese household balance sheet is overwhelmingly concentrated in real estate. Negative wealth shock suppresses spending at a time when a strong spurt in consumption is needed for a meaningful economic recovery.
The outlook for trade is cautious. Rising interest rates alongside dwindling fiscal support in the West squeeze real household income, resulting in weaker retail spending. And with global reopening unleashing pent-up demand for services, overseas orders for Chinese merchandise may start declining soon. Shipments of laptops and clothing alike decelerated in 1H commensurate with such changing spending patterns. Tariff reductions by Washington, if any, would likely have a modest impact on China’s export given massive inventories accumulated by American companies in the past two quarters.
Countering slowdown by infrastructure push. The NDRC approved 48 fixed-asset investment projects worth RMB654bn during January-May, with more in the pipeline. Planned investment year to date has risen by 10.5% to RMB12.7tn. Plunging land sales and burgeoning local government debt complicate financing, however.
Among 31 provinces, 26 had debt to fiscal income ratios over 100% as of April, with Tianjin topping the chart at 214.6%. Raising budget deficit or bringing forward special bond issuance from next year’s quota could offset the shortfall. The positive economic impact will likely be evident in 4Q given the time lag between project approval and execution.
PBOC’s lax policy in 1H kept a lid on credit costs across the yield curve. New yuan loans rose for a second month in June to RMB2.81tn. Since July the authority withdrawn a net RMB428bn via open market operations, more than the net injection made in June. That may indicate a subtle shift in policy bias, reducing the likelihood of further LPR and reserve ratio cuts.
As highlighted earlier (see here), a more aggressive Fed policy will limit PBOC’s room to loosen. Excessive easing would exacerbate pressure on the CNY, which has already depreciated 6.0% against the dollar since end-March. Interbank rates will level off over the course of policy normalization. We expect the volume-weighted average of 7-day repo rate to trade higher in 2H and to anchor around the PBOC’s seven-day reverse repo rate of 2.1.
Against such backdrop, 2022 real GDP projection is revised downward to 4.2% (3Q: 5.3%, 4Q: 5.5%) from 4.8%.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
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