BEIJING – China’s economy contracted in the three months ended in June compared with the previous quarter after Shanghai and other cities were shut down to fight the coronavirus outbreak, but the government said a “steady recovery” was underway after businesses reopened.

The world’s second largest economy shrank by 2.6%, down from the January-March period which had already weakened by 1.4%, government data showed on Friday. Compared to the previous year, measures that can hide the recent volatility, growth dropped to 0.4% from the initial 4.8%.

Performance was “much weaker than expected,” Rajiv Biswas of S&P Global Market Intelligence said in a report.

Asian markets were mixed following the news. Hong Kong fell 0.8% in the morning while Shanghai, Tokyo and Seoul gained.

Anti-virus controls have shut down Shanghai, the world’s busiest port, and other industrial hubs since late March, raising concerns that global trade and production could be disrupted. Millions of families were confined to their homes, which dampened consumer spending.

Factories and offices were allowed to reopen in May, but economists say it could be weeks or months before jobs return. Economists and businesses say China’s trading partners will see disruptions to shipping in the next few months.

“The resurgence of the epidemic has been achieved,” the statistics office said in a statement. “The national economy has recovered.”

Data on industrial output, consumer spending and other trends showed overall growth was slower than the headlines, Capital Economics’ Julian Evans-Pritchard said in a report.

“Even counting June’s strength, the data is consistent with y/y (year-on-year) growth in the last quarter,” wrote Evans-Pritchard. “This is not the first time official GDP figures have shown a recession.”

The slowdown hurts China’s trading partners by reducing demand for oil, food and other imports.

The number of infections in China is low, but Beijing has responded to its biggest outbreak since the outbreak began in 2020 with a “zero-COVID” policy that aims to isolate anyone infected with the virus. The ruling party has changed and established housing or disease centers but the restrictions affected areas with millions of people.

The ruling Communist Party is promising tax cuts, free rent and other subsidies to get companies back, but many forecasters expect China to fall short of the ruling party’s 5.5% growth target this year.

Other major economies are showing growth compared to the previous quarter, making their shares look lower than China’s. Beijing has for years reported growth only compared to a year ago, which was a short-term change, but has since released quarterly figures.

Forecasters say Beijing is using careful, targeted stimulus rather than all-out spending, a strategy that may take time to show results. China’s leaders worry that excessive spending could lead to more distressed housing prices or higher corporate debt, which they worry is too high.

Growth in the first half of the year was 2.5% over a year ago, one of the weakest in the last three decades.

Retail sales fell 0.7% from a year earlier in the first half after falling 11% in April.

Investment in industry, real estate and other fixed assets rose 6.1%, reflecting the ruling party’s efforts to boost growth by boosting construction spending and ordering public companies to spend more.

China is also facing headwinds due to global energy shortages. Exports jumped 17.9% in June last year, but forecasters say it shows ports are clearing cargo after anti-virus measures are lifted. They say that growth can be backward.

Slower growth in the United States and Europe “could weaken demand for Chinese exports,” Biswas said.

China recovered quickly from the pandemic in 2020, but activity weakened as the government tightened credit controls and its massive real estate industry, which supports millions of workers. Economic growth slowed due to a slowdown in construction and housing sales.

Investors are waiting to see what will happen to one of China’s largest manufacturers, the Evergrande Group. It has been struggling since last year to avoid repaying the $310 billion it owes to banks and bondholders.

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