GDP growth slowed to 0.4 percent annually in the second quarter of 2022, from 4.8 percent annually in the first quarter. However, the economy has managed to avoid a decline, despite measures to fight the epidemic, including lockdowns, to contain the epidemic of COVID-19 in many places in the country in April and May.
Our (Standard Chartered) calculations show China’s economic growth widening to 4.0 percent in the second quarter from -0.5 percent in the first quarter. Monthly data showed the economy continued to recover in June, as China eased its COVID-19 restrictions due to a decline in new infections since May. Industrial growth rose again to 3.9 percent annually in June from 2.9 percent annually in April and 0.7 percent annually in May, although the pace was slower than the 7.5 percent in January-February.
The economic growth of the fixed income rose to 5.8 percent annually in June from 4.7 percent in May, led by the recovery of operating expenses (8.2 percent annually compared to 7.2 percent in May) and economic growth (9.9 percent). compared to 7.1 percent previously).
In addition, the impact of epidemic prevention and control measures and the sales sector also decreased, their growth returned to 1.3 percent per year and 3.1 percent per year, respectively, in June (from 5.1). and -6.7 percent in May). Looking to the future, we hope that China’s economy will improve in preparation for the 20th National Congress of the Communist Party of China on encouraging growth and anti-epidemic policies.
Good outlook in Q3, Q4, labor market very important
We expect GDP growth of 5.3% per annum in the third quarter and 5.9% per annum in the fourth quarter, and we continue to call for no further changes in the medium level (MLF) or reserve requirement ratio (RRR) until the end of 2023.
While this year started better than we expected, China’s economy fell in the second quarter due to new epidemics of COVID-19, domestic housing concerns, and the international consequences of the Russia-Ukraine war.
The economic downturn particularly affected the labor market for young people in the second quarter. According to government data, youth (16-24-year-old) unemployment rose to 19.3 percent in June, despite an improvement in employment among 25-59-year-olds for the second month (with their unemployment rate falling from 5.3). . in April to 4.5 percent in June).
We expect the youth job market to peak in July and August, when more than 10 million college graduates are about to enter the workforce.
Urban household income and consumer spending were also affected in the second quarter. In nominal terms, the growth of urban losses slowed to 1.5% per year in the second quarter from 5.4% per year in the first quarter and average growth of 5.8% in 2020-2021. And municipal spending fell by 4.5% year-on-year in the second quarter, compared to growth of 5.7% in the first quarter and average growth of 4.2% in 2020-2021.
At the State Council meeting on July 13, Premier Li Keqiang said the government will strive to ensure that at least one person is employed per family and increase the employment of migrants in government-sponsored projects. The government has also warned against discrimination against those who have tested positive for COVID-19 but have recovered, and has pledged to increase support for more than 200 million people in flexible jobs.
Consumer spending to continue to normalize
Although we expect consumer spending to improve in the second half of the year due to the reduction in food prices due to COVID-19, the pace of recovery may be slow (rather than fast).
The growth of retail sales returned to 3.1 percent year-on-year in June after a sharp fall of 11.3 percent year-on-year in April and 6.7 percent in May. However, the pace of growth remained slow compared to the growth of 6.7 percent in January-February and the epidemic rate of 8.1 percent in 2019.
With China’s restrictive policies still in place, travel restrictions (even if severe) and the fear of contracting COVID-19 are expected to continue in the consumer market, with many people avoiding travel, shopping and dining.
A drop in family confidence and a reluctance to take on more debt could also hurt consumer spending in the near future.
According to the People’s Bank of China, households’ confidence in their future jobs and income fell sharply in the second quarter, and the proportion of people who want to save more and invest less rose to 58.3 percent from 54.7 percent in the first quarter, year-on-year. New home loans fell by 38% year-on-year in June compared to growth of 35% in March 2021. As a result, sales of big-ticket items continued to decline, while sales of residential properties increased by 21.8 percent year-on-year in June, compared to -36.6 percent year-on-year. year in May and 42.4 percent year on year in April.
Housing demand remains weak
Demand for housing remains weak despite easing regulations, reflecting concerns about falling home prices and risk to homebuilders, as well as structural issues such as low prices and rising mortgage rates.
Overall, economic growth reached 5.8 percent per year in June from 4.7 percent in May, led by the restoration of infrastructure and the growth of production costs, up to 8.2 percent per year and 9.9 percent per year, respectively. . Home sales, by contrast, fell 9.7 percent year-over-year in June compared to 7.7 percent year-over-year in May. However, we expect the growth of the construction industry to increase significantly to 10-15 percent in the coming months due to increased government support.
The consumer price index (CPI) and price inflation (PPI) came in slower than market expectations in June, at 2.5 percent year-on-year and 6.1 percent year-on-year, respectively. And we expect the CPI to rise sharply in the first quarter of 2023 ahead of the global recession.
Under the CPI inflation appears to be stable, as the inflation of food and non-food prices increased rapidly in June to 2.9 percent per year and 2.5 percent per year, respectively, from 2.3 percent and 2.1 percent in May. Rising food prices will be the main driver of inflation in China through the first half of 2023, led by higher pork prices.
The drivers of higher non-food CPI prices in June were broad, including the continued upward trend in consumer prices; higher travel and household costs due to the easing of travel restrictions in June; and rising oil prices.
Headline PPI inflation fell to 6.1 percent year-on-year in June from 6.4 percent in May, and we expect it to moderate in the second half of the primary results, slowing global economic growth and reducing asset-related problems.
Slower export growth rose to 17.9 percent year-on-year in June from 16.9 percent in May. Inflation, however, has hindered the rapid decline in China’s real growth rate due to the slowdown in the global economy and China’s declining share of global gross domestic product. Data from the International Monetary Fund showed that China’s annual share of global exports fell to 14.3 percent in March from a forecast of 14.8 percent in March 2021.
Instead, China’s export growth slowed to about 1.6 percent in the second quarter of 2022 from 10.4 percent annually in the fourth quarter of 2021, while exports remained weak, only 1 percent year-on-year in June. common words (in contrast to 4.1 percent in May). China’s real sales fell nearly 12% year-on-year in the first quarter.
A sharp decline in imports lifted China’s trade volume to $97.9 billion in June from $78.8 billion in May, lending the Chinese yuan a stronger U.S. dollar. And M2 growth (the amount of money sold in banks, coins, bank deposits and national savings accounts) rose to 11.4 percent year-on-year in June from 11.1 percent in May, while new yuan loans jumped to 2.81 trillion yuan. ($ 415.84 billion) in June, raising the growth of loans by 0.2 percent to 11.2 percent annually.
Second half growth expected to be 5.6%
Since China’s second quarter GDP growth (0.4 percent year-on-year) is in line with our forecast of 0.3 percent year-on-year, we are keeping our GDP growth forecast at 5.3 percent year-on-year for the third quarter, 5.9 percent year-on-year for the fourth quarter and an average of 5.6 percent in the second half of the year.
We also maintain our call for no further changes to the MLF or RRR rate until the end of 2023. The window for further rate cuts may be closed due to increased central bank easing, China’s rising CPI, and economic recovery in the second half of 2022.
Without lowering interest rates, the People’s Bank of China should increase the use of credit facilities and adjust deposit rates to adjust the growth of corporate loans and borrowings.
We expect the government to meet or exceed this year’s budget to support the economy as the COVID-19 crisis continues and the global economy slows down. The budget deficit (including the deficit, regional special bonds and transport costs) is equal to 6.9 percent of GDP in 2022, more than the 5.2 percent in 2021.
A fully implemented budget should bring economic growth of 1.7 percent of GDP in 2022, raising annual GDP by 0.9 percent. We expect, spending cuts are needed in the second half, in our opinion, if the government wants to avoid breaching the annual growth rate of 6.9 percent of GDP.
Alternatively, if the government wants to save money at the given level, we estimate that 2.8 trillion yuan of additional money is needed. The latter option is more likely, in our opinion, based on what has recently been reported. The government can use the remaining funds from previous acquisitions or advance the 2023 special bond issue to cover the shortfall.
In order to bridge the gap in infrastructure investment, the government has announced that it will issue 300 billion yuan of bank bonds and increase bank loans by 800 billion yuan this year. And media reports indicate that China may set up a 500 billion yuan investment fund and may allow local governments to fund some of next year’s projects in the fourth quarter of 2022.
Li Wei is an economist, China Standard Chartered Bank (China); Ding Shuang is an economist, Greater China and North Asia Standard Chartered Bank (HK); and Hunter Chan is an economist, Greater China Standard Chartered Bank (HK).
The views do not reflect China Daily.
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