Chinese output may have recovered to 2019 levels in May, economists say

The latest batch of Chinese economic indicators came in below economists' forecasts but some analysts said they would still lead to upwards forecast revisions.

In particular, Capital Economics's Martin Rasmussen said the return to growth in services "suggests that overall economic output returned above 2019 levels in May for the first time since the COVID-19 outbreak."

Furthermore, riding a wave of government spending on infrastructure projects, the year-to-date rate of growth in fixed asset investment improved to -6.3%, implying that the year-on-year rate of growth rose from 0.6% for April to 3.9% in May.

Infrastructure construction paced gains, accelerating from 4.6% year-on-year in April to 11.6%.

Industrial production was thus boosted from April's gain of 3.9% to 4.4% (consensus: 5.0%).

And in services, activity recovered to its levels from May, expanding at a 1.0% year-on-year pace following April's 4.5% drop, as the pace of contraction in retail sales eased from -7.5% to -2.8%.

Surveyed unemployment also retreated, from 6.0% in the month before to 5.9% for May.

"But the bulk of job losses from COVID-19 were among migrant workers, who are not properly accounted for in the survey," Rasmussen added.

"There are signs elsewhere that migrant job growth picked up in May, especially in the construction sector."

Commenting on the overall implications of the data, Rasmussen said: "We had previously thought that China’s economy wouldn’t return to positive year-on-year growth until Q3. But today’s data suggest that this milestone may be reached this quarter and we will be revisiting our GDP forecasts shortly.

"[...] What’s more, a new COVID-19 outbreak in Beijing as sparked fears of a second wave in China. But there have been a number a regional outbreaks in recent months, all of which resulted in limited economic disruption as they were quickly contained with localised lockdowns."

Economists at ING on the other hand were more circumspect, telling clients that the improvement in retail sales could be a one-off linked to the country's Golden Week holidays in May.

"We need to keep an eye on June’s data to confirm whether the trend of spending really continues to improve," they said.

And their take on the latest investment data was considerably more downbeat than Capital Economics's.

From the breakdown of the industrial production data, they concluded that construction might in fact be geared more towards property markets and not infrastructure.

"This is inevitable, property developers need to keep selling properties to keep up their cash flow. And to keep sales moving, they need new construction. But this property is probably not shopping malls and is more likely to be residential properties."

Miguel Chanco at Pantheon Macroeconomics took a middle-of-the-road approach, saying: "Trends at the margin are likely to continue softening, as the burst of momentum following the end of China’s lockdown continues to fade.

"However, [month-on-month] gains are likely to remain firm by Q4 standards, at least in the short run, as external demand recovers on the back of more countries easing their lockdowns, and as the government leans on infrastructure development to stimulate growth."