"Headwinds" from the world make China's economy even more gloomy

China's economic recovery is losing momentum, following a surge in business and consumer activity earlier this year, according to Bloomberg.

Những 'cơn gió ngược' từ thế giới góp phần khiến kinh tế Trung Quốc thêm ảm đạm

The weakening global economy also adds to China's gloom. (Source: CNN)

Official data released by China's National Bureau of Statistics (NBS) on May 16 showed that industrial output, retail sales and fixed investment in the country grew at a much slower pace than expected in April 2023.

Youth unemployment rate soars

Specifically, industrial production in April increased 5.6% compared to the same period last year, much lower than the 10.9% forecast by economists in a Bloomberg survey. Retail sales increased 18.4%, largely due to a lower figure last year. And growth in fixed-asset investment slowed to 4.7% in the first four months of the year.

A big worry is that youth unemployment has soared to a record high of 20.4% - a sign that the post-pandemic recovery is not strong enough to absorb the millions of new entrants to the labour market.

"Many people, including investors, see this as a leading indicator," said Winnie Wu, equity strategist at BofA Securities. "If young people can't find jobs, if they don't have a guaranteed income, where is the confidence, where is the recovery in consumption coming from?"

Other economic indicators are also confirming that the recovery in the world’s second-largest economy is slowing. China’s property market remains weak, despite early signs of rising home sales. Meanwhile, inflation is near zero and consumers are reluctant to borrow.

Also in April 2023, real estate investment fell 16.2% compared to a year earlier. New home construction continued to decline.

Output of key items used in construction, such as aluminium and steel, fell in April from the previous month.

Economists say more policy action is needed to sustain the recovery. Central bank steps alone will not be enough to boost consumer and business confidence.

“Policy support is an important step, but the question is which policy stimulus is the most important?

Industrial policy will probably play a more important role, followed by fiscal stimulus, particularly to stimulate consumption. Monetary policy can play a complementary role, but frankly, cutting interest rates is not the most urgent response."

The People’s Bank of China (PBOC) signaled on May 15 that it would maintain its accommodative policies, leading some economists to predict that the PBOC could take more drastic action in the coming months, including reducing the reserve requirement ratio or cutting interest rates.

Consumption remains steady, but a spike in youth unemployment to a record high raises questions about the sustainability of that recovery, said Michelle Lam, Greater China economist at Societe Generale SA.

“The latest economic data in China could open the door for further cuts in reserve requirements and interest rates, possibly in June,” he noted.

In recent years, the PBOC has refrained from aggressive interest rate cuts, instead prioritizing targeted stimulus measures.

"Headwind" from the world

A weakening global economy has also added to China’s gloom. High inflation and rising interest rates in major markets of the world’s second-largest economy have sharply reduced consumer demand for Chinese-made goods.

Exporters at the Canton Fair, China's largest trade fair, recently reported a drop in overseas orders, while purchasing managers surveys also showed weakness in the manufacturing sector, according to Bloomberg .

The NBS also highlighted global and domestic risks, saying: “The global environment remains complex and domestic demand appears to be insufficient. In addition, the internal recovery momentum of the economy is still not strong.”

In addition, infrastructure investment and manufacturing, which helped offset the decline in property investment, both slowed in April from the previous month, a sign of weaker government spending and weak business confidence.

Still, some experts remain bullish on China’s economy, including economists at Goldman Sachs Group Inc. They downplayed concerns about a derailed recovery, keeping their full-year 2023 growth forecast unchanged at 6%.

“We do not view the April activity data as a turning point for growth. We believe China’s consumption-led post-reopening recovery remains on track,” the economists said.

Source