China’s economy shrinks sharply in Q2, global risks darken outlook

China’s economy contracted sharply in the second quarter, highlighting the colossal toll on activity from widespread COVID lockdowns and pointing to persistent pressure over coming months from a darkening global growth outlook.

Friday’s data comes at a time of fears of a global recession as policymakers jack up interest rates to curb soaring inflation, heaping more hardship on consumers and businesses worldwide as they grapple with challenges from the Ukraine war and supply chain disruptions.

Gross domestic product fell 2.6 per cent in the second quarter from the previous quarter, official data showed, compared with expectations for a 1.5 per cent decline and a revised 1.4 per cent gain in the previous quarter. On a year-on-year basis, GDP in the April-June quarter grew a tepid 0.4 per cent, missing forecast of a 1.0 per cent gain, according to a Reuters poll of analysts, a sharp slowdown from 4.8 per cent in the first quarter.

For the first half of the year, GDP grew 2.5 per cent, well below the government’s target of around 5.5 per cent growth for this year.

“China’s economy has stood on the edge of falling into stagflation, although the worst is over as of the May-June period. You can rule out the possibility of a recession, or two straight quarters of contraction,” said Toru Nishihama, chief economist at Dai-ichi Life Research Institute in Tokyo.

“Given the tame growth, China’s government is likely to deploy economic stimulus measures from now on to rev up its flagging growth, but hurdles are high for PBOC to cut interest rates further as it would fan inflation which has been kept relatively low at present.”

Full or partial lockdowns were imposed in major centres across the country in March and April, including the commercial capital Shanghai, which saw a year-on-year contraction of 13.7 per cent in GDP last quarter.

While many of those curbs have since been lifted, and June data offered signs of improvement, analysts do not expect a rapid economic recovery. China is sticking to its tough zero-COVID policy amid fresh flare-ups, the country’s property market is in a deep slump and the global outlook is darkening.

The imposition of new lockdowns in some cities and the arrival of the highly-contagious BA.5 variant have heightened concerns among businesses and consumers about a prolonged period of uncertainty.

Analysts believe room for the central bank to ease policy further could be limited by worries about capital outflows, as the US Federal Reserve, and other economies, aggressively raises interest rates to fight soaring inflation.

China’s rising consumer prices, while not as hot as elsewhere, also may add to constraints on monetary policy easing.

A Reuters poll forecast China’s growth to slow to 4.0 per cent in 2022, far below the official growth target of around 5.5 per cent. Data on June activity, also released Friday, showed that China’s industrial output grew 3.9 per cent in June from a year earlier, quickening from a 0.7 per cent rise in May, although below a 4.1 per cent increase forecast in a Reuters poll.

Retail sales, on the other hand, rose 3.1 per cent from a year ago in June and marked the quickest growth in 4 months, after authorities lifted a two-month lockdown in Shanghai. Analysts had expected a 0 per cent increase after May’s 6.7 per cent drop.