China’s Economic Recovery Is Losing Steam

China’s Economic Recovery Is Losing Steam

Monthly indicators of industrial, consumption and investment activity all fall short of expectation

China’s economy slowed more than expected in July as extreme weather and the highly contagious Delta variant of the coronavirus swept across the country, adding more strains to a recovery that was already plateauing more than a year after the pandemic first exploded.

Monthly indicators of industrial, consumption and investment activity all showed growth retreating more quickly than expected—and decelerating from June’s yearly growth rates—according to data released Monday by China’s National Bureau of Statistics.

The fresh numbers come after many economists and research firms had already begun lowering their expectations of China’s economic growth, as signs of slowing momentum collide with renewed concerns around the impact of pandemic restrictions.

The data included two key contributors to the headline gross domestic product figure: industrial production, which rose 6.4% from a year earlier, and fixed-asset investment, up 10.3% during the first seven months of the year from the year-ago period. Both rates of increase fell short of expectations, and marked a slowdown from June’s growth rates.

The story was even more disappointing with respect to domestic consumption, another major contributor to the GDP figure and one that was already lagging far behind China’s industrial and export sectors. Retail sales growth slowed to 8.5% in July compared with a year earlier, a pullback from June’s 12.1% increase.

China’s headline jobless rate, the surveyed urban unemployment rate, rose to 5.1% in July, up from 5.0% in June.

“Growth in some consumer sectors and services slowed,” Fu Linghui, a spokesman for the statistics bureau, said Monday, pointing in particular to parts of central China that have been affected by flooding. Mr. Fu warned that growth in the second half of the year was likely to be lower than in the first six months.

In recent weeks, Goldman Sachs, Morgan Stanley and Nomura, among other large investment banks, had reduced their forecast for China’s full-year growth—to around 8.2% or 8.3%, from previous estimates ranging from 8.6% to 8.9%.

Others had signaled that they were ready to follow suit, depending on the July data—a set of numbers that will likely confirm the increasing pessimism about China’s economic outlook.

After Monday’s data release, ANZ cut its full-year GDP target to 8.3%, from 8.8%, citing the “broad-based slowdown in domestic activities in July, which suggests that the economy is rapidly losing steam.”

Economists remain divided on whether Chinese policy makers will step in with support for the economy. Even with the disappointing figures, China is projected to be comfortably on pace to exceed its full-year growth target of 6% or more. In the first half of 2021, China’s economy grew 12.7% compared with the same period a year earlier.

Bill Adams, a senior economist at PNC Financial Services, predicted after the latest data release that Beijing was unlikely to be as aggressive as it was earlier in the year. “Chinese policy makers need to balance the growth outlook against the global uptick in inflation,” said Mr. Adams, who is based in Toledo, Ohio.

One key question is how quickly authorities are able to control the current outbreak of the Delta variant, which has resulted in the shutdown of a major Chinese port and led to broader travel restrictions across the country since it first appeared about a month ago.

In recent days, the official tally of daily symptomatic infection cases has steadily decreased, leading to optimism that the current wave will prove as short-lived as previous waves.

But the impact is likely to still be felt in the retail sector in August, a key month for travel spending. After a string of periodic outbreaks, China’s retail outlets, restaurants and the tourism and transport sectors could ill afford another wave of targeted lockdowns and stricter quarantine rules.

Lucas Liu, an accountant working in Beijing, canceled a planned road trip in August because of the Delta variant. Although municipal officials didn’t restrict anyone from leaving the city, Mr. Liu worried that if he traveled to a city where new infections were found, he could be quarantined there.

“I don’t want to take the risk, although I really want to take my summer vacation,” Mr. Liu said.

Along China’s export-reliant coast, the recent Delta variant outbreaks have made it harder for companies like Senyuan Furniture Group, a high-end custom furniture maker based in the southern province of Guangdong, to service existing customers and scout out new ones.

Wei Wei, who handles overseas clients for the manufacturer of furniture to five-star hotels and other clients in the U.S., Japan, Middle East and Southeast Asia, says the company’s reliance on on-site visits has left it especially hard hit by the prolonged restrictions on international travel.

“It’s hard for us to do business if we can’t visit our customers in person, not to mention attract new clients,” Mr. Wei said.

Another factor weighing on consumer spending may be concerns around Beijing’s broader campaigns against the technology and private education industries, which have led to many workers losing their jobs, said Iris Pang, a Hong Kong-based economist with ING Bank, who before Monday’s data had lowered her forecast for third-quarter GDP to 4.5%, from 5.5% previously.

“Though the number of laid-off workers is not large, sentiment can easily spread to others, who may be more worried about their career prospects and grow more cautious in their spending,” Ms. Pang said.

—Bingyan Wang, Grace Zhu and Xiao Xiao contributed to this article.

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