China’s Economic Recovery Is Looking Gloomier
Growth across a range of Chinese economic indicators pulled back sharply in August, as a new outbreak of the Covid-19 Delta variant and tighter government regulations on the property market hit consumer spending and the housing sector.
Retail sales, a key gauge of China’s consumption, rose just 2.5% in August from a year earlier, down sharply from July’s 8.5% year-over-year growth, according to data released Wednesday by China’s National Bureau of Statistics. The result marked the lowest pace of growth in a year and missed by a large margin the 6.3% increase expected by economists polled by The Wall Street Journal.
Separate data released Wednesday by the statistics bureau showed home sales by value falling 19.7% in August from a year ago, the largest drop since April 2020—at the height of the pandemic. Average new-home prices in 70 major Chinese cities inched 0.16% higher in August from the previous month, the smallest such gain this year.
Real-estate investment in the first eight months of the year, meantime, increased 10.9% year over year, slowing from a 12.7% gain in the January-July period. Construction starts, as measured by floor area, dropped 3.2% in the January-August period, accelerating from a 0.9% year-over-year decline in the first seven months of the year.
China’s property market has long been a key driver of the country’s growth, while reorienting the economy toward domestic consumption has become a priority for policy makers concerned about an unhealthy tilt toward infrastructure- and export-led growth.
The weakness in these two sectors is likely to add to concerns about the growth trajectory in the world’s second-largest economy and prompt questions about whether authorities will intervene to support growth. While policy makers remain comfortably on pace to hit their full-year growth domestic product target of at least 6%—first half GDP growth was 12.7% year over year—further deterioration in these two sectors could change the calculus for leaders in Beijing.
The weakness in retail spending, in particular, came as Chinese authorities struggled with a Delta variant outbreak that began in late July and quickly spread across the country, prompting the imposition of restrictions on people’s movements.
As a result, services requiring close human-to-human contact, such as restaurants and tourism, were hit particularly hard. Sales in China’s catering sector fell 4.5% in August from a year earlier, down sharply from July’s 14.3% year-over-year jump, the statistics bureau said.
Though the outbreak that began in late July has largely been contained, a fresh wave of infections in China’s southeast in the past week—authorities have reported more than 100 cases of symptomatic domestic transmission in the past four days—suggests that the toll of China’s “Covid zero” strategy on the country’s retail sector won’t likely abate soon.
Consumption has been the weakest link in China’s pandemic recovery and the last corner of the economy to get back on its feet, hurt by stagnant income growth and the government’s stringent Covid-19 measures.
Perhaps most worrying for the retail sector is the timing of this latest wave of cases, which comes just days ahead of two long holidays—Mid-Autumn Festival and National Day—that are typically a boom time for tourism and spending.
“We reckon that China’s zero-covid strategy could be increasingly costly for the Chinese economy,” Nomura economist Ting Lu wrote in a note to clients late Tuesday.
On the real-estate front, recent campaigns to disconnect educational opportunity from homeownership and rein in property developers’ ability to borrow have dented sentiment and pushed some prominent home builders to the brink of default—chief among them China Evergrande Group.
The weakness in retail sales and the property sector add to an increasingly cloudy outlook for China’s economy. July’s data had already shown weakness across the board, prompting economists at the time to cut forecasts of China’s growth.
The latest headwinds, including the likelihood of further Covid-19 outbreaks and regulatory actions targeting the private sector, are expected to weigh on sentiment.
Other indicators released by Beijing on Wednesday offered little respite for the broader economy.
A 5.3% year-over-year rise in industrial output in August marked a deceleration from July’s 6.4% increase and fell short of the 5.6% growth pace forecast by surveyed economists. It was the slowest growth rate in more than a year.
Fixed-asset investment, meantime, increased 8.9% in the January-August period, compared with the 10.3% pace recorded in the first seven months. Economists expected the figure to grow by 8.8%.
China’s surveyed urban unemployment rate remained unchanged at 5.1% in August, the statistics bureau said.