A view from the observation deck of the Shanghai Tower in Shanghai, China, Sunday, April 9, 2023. China’s economic recovery is picking up speed after Covid restrictions were abruptly lifted and the property market stabilized, although the rebound remains rather patchy and policymakers have no plans to scale back monetary support for now. Photographer: Qilai Shen/Bloomberg via Getty Images
Shen Qilai | Bloomberg | Getty Images
China’s much-vaunted economic rebound after emerging from a strict Covid-free lockdown has yet to fully materialize, prompting some economists to speculate that further fiscal stimulus or monetary policy easing may be in the offing.
China’s services and consumption data for April were strong, in line with consumers’ expectations, as pent-up demand was unleashed – but the rebound in demand for services has yet to spill over into greater demand for goods, partly because unemployment remains high.
From January to April, the profits of China’s major industrial enterprises fell by 20.6% year-on-year. Manufacturing activity also contracted for the first time in three months. Caixin China General Manufacturing PMI.
Industrial production rose 5.6% in April from a year earlier, an acceleration from the previous month, but only half the rate of growth expected by economists surveyed.
The job market also remains fragile. Data from China Statistics Bureau Statistics show that of the 96 million urban laborers aged 16 to 24, 6 million are currently unemployed. Based on this figure, Goldman Sachs estimates that there are 3 million more urban unemployed youth now than in the period before the Covid-19 pandemic.
In a research note on Monday, Capital Economics assessed that China’s economic recovery was still making progress early in the second quarter despite losing some momentum, with room for further improvement led by the services sector.
“Indeed, more timely data, including the Labor Day holiday, suggest that tourism and consumer spending are still strengthening this month,” said China economist Sheana Yue and Julian Evans-Pritchard, head of China’s economy ministry.
“But sequential growth will moderate for the remainder of the year as challenging external conditions continue to cloud the export outlook, housing market distress persists and broad policy support is unlikely to be forthcoming.”
More stimulus, targeted easing
Georgios Leontaris, Chief Investment Officer, EMEA HSBC Global Private Banking and Wealth told CNBC on Monday that weak labor and commodity demand could force action from the Chinese government and central bank.
“The way we look at things is that China is going to have to deploy more fiscal stimulus, and more targeted easing,” he said.
“At the end of the day, unemployment, especially among young people, is too high and they’re going to have to bring it down to meet their growth targets going forward.”
The ruling Communist Party of China has set an economic growth target of “around 5%” for 2023 – the country’s lowest level in more than 30 years. China’s GDP grew 4.5% in the first quarter as the economy emerged from strict Covid restrictions that had been in place for almost three years. Those measures are widely expected to ease in the second quarter.
In March, the People’s Bank of China announced that it would cut the reserve requirement ratio for banks for the first time this year to support the fledgling economic recovery.
China’s State Council announced a 15-point plan in April to more effectively match young job seekers with jobs, but analysts point to a longer-term structural mismatch in the country’s labor market.
Despite the weak April data, Shan Hui, chief China economist at Goldman Sachs, said there were few signs of imminent major macro policy easing, while the central bank’s first-quarter monetary policy report “sounded neutral”.
“Many recent policy communications have focused on medium-term themes, such as ‘modern industrial system’, ‘national unified market’ and a new financial regulatory framework,” Shan noted last week.
“To be sure, interbank liquidity has remained ample and we think the central bank may cut the RRR in June to boost confidence. But we don’t expect a policy rate cut or major fiscal stimulus unless exports fall sharply Over the next few months.”
Given the sluggish recovery, any consensus among economists on the trajectory of fiscal and monetary policy appears to be crumbling.
Morgan Stanley It hinted earlier this month that the central bank may implement “restrained additional easing” from late June to late July, suggesting limited spillovers to goods from a rebound in services and an “incomplete” job market recovery.
“Meanwhile, infrastructure investment – a vital support to the economy over the past nine months to boost job growth – is decelerating amid rising funding pressures, following an early policy load in the first quarter,” said the bank’s Asia-Pacific analyst. The research team said.
“With weaker-than-expected growth in the second quarter and a negative output gap, labor market pressures are likely to persist and pose risks to social stability, so we believe further policy easing is needed to sustain the recovery.”