The Chinese economy slowed unexpectedly in July, with factory and retail activity pressured by Beijing’s zero-covid policy and a real estate crisis, while the central bank surprised markets by cutting key interest rates to boost demand.
Industrial production in July grew 3.8% year-on-year, just down from 3.9% in June, data from the National Bureau of Statistics (NBS) shows. That compares with a 4.6% increase that analysts expected in a Reuters poll.
Retail sales, which only turned positive in June, were up 2.7% from a year ago, missing analysts’ forecast of 5% growth and falling below June’s 3.1% growth.
The world’s second largest economy narrowly escaped a contraction in the June quarter, hampered by the closure of the commercial center of Shanghai, a deeper downturn in the real estate market and continued weak consumer spending.
There are risks to growth, however, as many Chinese cities, including manufacturing hubs and popular tourist spots, imposed lockdown measures in July after new outbreaks of the more transmissible Omicron variant were found.
“The risk of stagflation in the global economy is mounting and the basis for domestic economic recovery is not yet solid,” the NBS warned in a statement.
The real estate sector, further shaken by a mortgage boycott that weighed on buyer confidence, deteriorated in July. Real estate investment fell 12.3% in July, the highest rate this year, while the decline in new sales deepened to 28.9%.
Chinese policymakers are trying to strike a balance between supporting a fragile recovery and wiping out emerging Covid clusters, with the economy expected to fall short of its official growth target of around 5.5% this year for the first time since 2015 .
“All economic figures were disappointing in July, with the exception of exports. Demand for loans from the real economy remained weak, pointing to a cautious outlook for the coming months,” said Nie Wen, a Shanghai-based economist at Hwabao Trust, adding that Covid outbreaks and the heatwaves in July weighed on activity. .
“Now it is becoming more and more challenging to even reach the growth of 5-5.5% in the second half.”
The employment situation remained fragile. The nationwide survey-based unemployment rate declined slightly to 5.4% in July, from 5.5% in June, although youth unemployment remained stubbornly high, reaching a record 19.9% in July.
To support growth, the central bank unexpectedly cut interest rates on major credit facilities for the second time this year on Monday. New yuan loans fell more than expected in July as businesses and consumers remained wary of taking on debt, data showed on Friday.
Wang Jun, an economist at Zhongyuan Bank, believes authorities will focus on implementing existing policies rather than rolling out aggressive new stimulus measures.
“We are now dealing with a typical liquidity problem. As generous as the credit supply is, businesses and consumers are cautious about taking on more debt,” Wang said. “Some are now even paying their debt in advance. This could herald a recession.”
Fixed asset investment, which Beijing had hoped would boost growth in the second half as exports weaken, rose 5.7% in the first seven months of the year from the same period a year earlier, compared to a expected increase of 6.2% and a decrease of 6.1% jump in January-June.