Chinese economy under pressure as factory output, retail sales growth slows sharply

BEIJING (Reuters) – Production at Chinese factories and growth in retail sales slowed sharply and missed expectations in July, as new outbreaks of COVID-19 and flooding disrupted business operations, adding to signs that the economic recovery is running out of steam.

Industrial production in the world’s second-largest economy grew 6.4% year-on-year in July, data from the National Bureau of Statistics (NBS) showed on Monday. Analysts had expected output to rise 7.8% after growing 8.3% in June.

Retail sales rose 8.5% in July from a year ago, well below the forecast increase of 11.5% and the 12.1% increase in June.

China’s economy has returned to pre-pandemic growth levels, but the expansion is running out of steam as businesses grapple with higher costs and supply bottlenecks. New COVID-19 infections in July also led to new restrictions, disrupting industrial production in the country already hit by inclement weather this summer.

Asian stock markets slipped on Monday after data showed a surprisingly sharp slowdown in the global growth engine.

Data earlier this month also showed export growth, which was a key driver of China’s impressive rebound from the COVID-19 crisis in early 2020, unexpectedly slowed in July. .

Consumption, industrial production and investment could slow further in August, Nomura analysts said in a note, due to COVID-19 checks and tightening measures in the real estate sector and heavily polluting industries.

Production controls sent crude steel production to the lowest monthly level since April 2020 in July.

Meanwhile, China has tightened social restrictions to tackle its latest outbreak of COVID-19 in several cities, affecting the service sector, particularly travel and hospitality in the country.

“Given China’s ‘zero tolerance’ approach to Covid, future outbreaks will continue to pose a significant risk to the outlook, even though around 60% of the population is now vaccinated,” said Louis Kuijs, Head of Asian Economics at Oxford Economics, in a Note.

The country also faced extreme weather conditions in several provinces, with record rainfall in Henan province last month causing flooding that left more than 300 people dead.

Rising commodity prices are also putting pressure on small and medium-sized businesses in particular. Small businesses are unable to pass recent increases in raw material costs on to buyers, said a sales manager at a medical equipment factory in eastern Jiangsu Province.

“We dare not raise our prices … but our prices cannot go down, otherwise there will be no profit,” he said.

Producer price inflation in China, which rose 9.0% from a year earlier in July, is likely to remain high for some time, the NBS said on Monday.

GROWTH OUTLOOK

A growing number of analysts have cut their third-quarter growth estimates for China. The country’s gross domestic product (GDP) increased by 7.9% in the April-June quarter compared to the previous year.

ANZ lowered its GDP forecast for 2021 to 8.3% from 8.8% after disappointing data in July.

“While they are unlikely to inject massive stimuli to boost overall growth, the central bank will maintain an easing bias,” ANZ analysts said in a note.

After the central bank cut the amount of liquidity banks are required to hold as reserves in July, many analysts expect another cut later this year to support growth.

China’s central bank injected billions of yuan in the form of medium-term loans into the financial system on Monday, which many market participants interpreted as an effort to support the economy, although the cost of such borrowing remained. unchanged.

Policy insiders told Reuters earlier in August that China was set to ramp up spending on infrastructure projects while the central bank is supporting the economy with modest easing measures.

Investments in fixed assets rose 10.3% in January-July compared to the same period a year ago, compared to an increase of 11.3% according to a Reuters poll and an increase of 12.6% in January- June.

Real estate investment, a crucial growth engine for China’s recovery from the COVID-19 disruptions, rose 12.7% in January-July, compared to a 15% increase in the first half of this year.

New home prices in China rose to a six-month low in July as authorities further tightened rules in the boiling real estate sector.