China loses momentum: industry and consumption miss expectations

The upturn in China is losing momentum in the face of new government measures against the spread of the coronavirus. Industrial production in the world’s second-largest economy grew just 6.4 percent year-on-year in July, lower than expected, statistics bureau data released in Beijing on Monday showed.

Analysts polled by Reuters had expected 7.8 percent after output rose 8.3 percent in June. Consumer spending was also lower than predicted, with retail sales rising 8.5 percent last month. Analysts had expected an 11.5 percent gain here, down from 12.1 percent in June.

“The recent rise in viral infections and containment measures by policymakers are taking their toll,” Commerzbank economists Hao Zhou and Marco Wagner wrote. Factories and ports, for example, had to be temporarily closed because of new Corona outbreaks.

This was compounded by severe flooding and heavy rainfall, for example in the economically important province of Henan. This exacerbated already existing supply bottlenecks and drove up costs.

“The recovery of the domestic economy still faces many challenges, and production constraints have increased,” said statistics bureau spokesman Fu Linghui. Asian stock markets reacted to the new data from China by falling.

Commodity prices create pressure

Early economists have lowered their growth forecasts for Asia’s largest economy. “Given China’s zero-tolerance approach to covid, future outbreaks will continue to pose a significant risk to the economic outlook, even though around 60 percent of the population is now vaccinated,” said economist Louis Kuijs of Oxford Economics. Experts at financial house ANZ lowered their forecast for gross domestic product growth this year from 8.8 to 8.3 percent.

Higher commodity prices are likely to put pressure on small and medium-sized enterprises in particular. These are unable to pass on higher costs to buyers, said a sales manager at a medical equipment factory in the eastern province of Jiangsu. “We don’t dare to raise our prices…. but our prices must not fall, or there will be no profit at all,” he said.

With recent weaker economic data, speculation is growing that the government and central bank may stimulate the economy more. “In our view, however, there is little sign for the time being that China will fundamentally change its policy,” Commerzbank economists expect. For example, the central bank left its interest rates on the medium-term lending facility unchanged at the start of the week, “suggesting that the authorities believe macroeconomic conditions are still within an acceptable range.”