China’s economy held up in the first quarter, according to official growth figures released Monday, but closely-watched retail sales data for March hinted at a slowdown tied to strict pandemic containment protocols.
Output increased 4.8% in Q1, Beijing said, much better than consensus, and up from Q4’s 4% pace (figure below). On this point, at least, I try to be polite, but I won’t obfuscate this quarter: Scarcely anyone takes the headline GDP numbers out of Beijing seriously. You might be able to extract something from the reported sequential rate of expansion, but the data is only meaningful because it’s all we have to go on.
The range of estimates, from 33 economists, was 2.3% to 6.6%. Recall that activity data for January and February was suspiciously robust, which may help to “explain” the sizable beat.
Take the headline for what it’s worth, which is either very little (the numbers are only as real as Beijing thinks they can be, which in turn depends on the circumstances) or quite a lot (these are the only official numbers we have, and they’re not completely fabricated).
“Much of the data reflects time before lockdown severity grew, and the war in Ukraine started to affect the economy,” Bloomberg’s Simon Flint said. “Furthermore, with China lagging its 5.5% growth targets for 2022, there may be the suspicion of pressure to demonstrate that the economy is holding up under the zero-COVID strategy.”
The overarching narrative is unchanged. China came into 2022 staring down myriad headwinds. Xi’s regulatory crackdown and accompanying societal overhaul weighed on the economy, especially the property sector, where curbs threatened to torpedo growth late last year, compelling the PBoC to pivot dovish after maintaining a neutral stance for most of the pandemic. Residential property sales for January through March fell 25.6% YoY.
Even if you were inclined to accept the above-mentioned activity figures for the first two months of the year at face value, the worst COVID outbreak since the onset of the pandemic introduced new headwinds as lockdowns imperiled consumption and raised the specter of more supply chain disruptions and logistics logjams.
Imports fell in March for the first time since August 2020, and tepid inflation, while welcome in many respects, is suggestive of lackluster domestic demand. March’s activity data, released Monday in conjunction with the GDP numbers, showed retail sales shrank 3.5% last month from the same period a year ago. It was the first decline since the summer of 2020 (figure below).
The range of estimates for retail sales was -7% to 5% from 28 economists.
Industrial output, meanwhile, slowed, even as 5% YoY growth managed to beat consensus. Some worried that factory stoppages tied to lockdowns would lead to a larger deceleration, especially considering persistent supply chain issues exacerbated by port bottlenecks. Fixed-asset investment for January through March was up 9.3% YoY, a deceleration from the pace seen over the prior two months, but better than expected nevertheless.
“GDP growth might avoid falling below 4% thanks to the infrastructure push, the reporting methods and the surprisingly strong data seen in January and February [but] there’s no denying that the economy is in distress right now,” SocGen’s Wei Yao and Michelle Lam said, prior to the release. “Shanghai’s lockdowns are not over yet, and more cities are doubling down and taking the same approach to contain local outbreaks, no matter how small,” they added, noting that “most high-frequency data are still falling, and in some cases even below Q2 2020 levels.”
The surveyed jobless rate at the end of March was 5.8%, up substantially from 5.5% in February. Property investment over the first three months of the year was up 0.7% from the same period in 2021. That figure was 3.7% in January-February.
Officials have pledged to support the economy with monetary and fiscal measures, and as expected, the PBoC delivered an RRR cut on Friday. But the broad reduction was just 25bps, and the implied liquidity release was less than half of the figure bandied about by analysts prior to the move. Although the MLF rate was unchanged this month, a loan prime rate reduction is still possible this week.
“If policymakers are as forward-looking as they are signaling, any positive growth surprise shouldn’t stop them from providing more easing to the economy,” SocGen’s Lam went on to say, adding that “easing alone [won’t] be able to offset the brutal effects of zero-tolerance lockdowns.”
