Why China growth at 0.4% in Q2 is bad news

China growth at 0.4% in Q2
China growth at 0.4% in Q2

by 5paisa Research Team Last Updated: Dec 10, 2022 - 04:46 pm 22.5k Views
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To add to the woes of the world economy, China's economic growth for the second quarter ended June 2022 slumped to just 0.4%. Clearly, the widespread COVID lockdowns have taken a massive toll on the economic activity in China. Now, China is not only at the centre of global consumption but also at the centre of the global supply chain. So, a slowdown in China is likely to impact consumption demand for everything from textiles to cars. It is also going to impact the availability of everything from steel to microchips.

Experts see the China data as representative of the larger malady of global recession that is now threatening the entire global economy. This is only adding to the woes of businesses globally as they are already grappling with multiple challenges ranging from the Ukraine war to supply chain disruptions. The annualized GDP growth in China for the April-June quarter came in at a mere 0.4% and it matters when it is the world’s second largest economy after the US. This is China worst show since 1992, of course excluding the pandemic contraction. 

Now, the forecast of second quarter GDP growth for China was 1.0% by Reuters. This was also sharply marked down from 4.8% in the first quarter, but the impact of the curbs and the lockdowns appear to be intense in the June 2022 quarter. If you compare this data on a sequential basis, then China’s GDP actually fell -2.6% over the first quarter, while it was actually expected to decline by about 1.4%. Now there are real fears that China may slip into stagflation, which is a combination of weak economic growth and sharply higher inflation.

The obvious inference now is that the Chinese government would embark on a stimulus program, although the size and the seriousness is not too clear. China is already facing a major problem with its real estate companies and its finance companies and it is doubtful how much either the Chinese government or the PBOC (Peoples Bank of China) can stimulate in these circumstances. One of the big risks for the PBOC to cut interest rates further is that it would fan inflation which has been kept relatively low for the time being.

You can actually blame it on the full and partial lockdowns imposed in major centres across China in March and April to curb the spread of COVID. Shanghai, which has been one of the worst hit by the COVID curbs, saw its GDP contract on a yoy basis by -13.7% in the second quarter. Beijing saw GDP shrink by -2.9% in Q2, so some of the most important towns in China have borne the brunt.

China has been ramping up policy support for the economy, but analysts are sceptical about the growth target of 5.5% for the full year. They think it would be hard to achieve without doing away with strict zero-COVID strategy. In fact, the latest Reuters forecast pegs the full year GDP growth for 2022 at closer to 4%. The big question is whether the PBOC will risk easing and monetary divergence at a time when the entire world is tightening rates and liquidity. That remains the million dollar question.

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