China’s economic growth is weakening and its effects may spill over to the rest of the world economy. After growing 4.5% in the first quarter, the Asian giant’s economy is beginning to show signs of slowing down and everything indicates that it is facing headwinds that will lead the way for the United States, Europe and Latin America. Among these signs, inflation is slowing down, exports and imports are not progressing as expected, real estate problems persist and youth unemployment remains high. Symptoms that already suggest monetary stimulus measures by the central bank to try to revive growth.
The year-on-year inflation rate in China stood at 0.1% in April, which represents a fall of six tenths with respect to the rise in prices of 0.7% in March and the lower rate of increase in the cost of life since the beginning of 2021, as reported by the National Statistics Office (ONE) on Thursday. The figures were partly affected by last year’s low base of comparison. Meanwhile, producer prices fell 3.6%, largely due to lower commodity costs, and was a steeper drop than experts expected.
There was also data released this week for imports from China, which contracted sharply in April, while exports grew at a slower pace, reinforcing signs of weak domestic demand despite the lifting of restrictions. A jug of cold water for the neighboring countries that export to the Asian giant and that expected that China’s exit from the Covid Zero policy would mean robust growth in their exports.
For its part, data from the People’s Bank of China indicate that credit and new loans were much lower than expected in April. Meanwhile, the housing market remains stagnant, although it is trying to come out of lethargy with stimulus measures, although uncertainty about the strength of the impulse continues. New home prices in China rose 0.5%m/m in March, following a 0.3% rise in February, the fastest pace since June 2021. On a yearly basis, however, the fall, with a decrease of 0.8% in March. Experts point out that the real estate crisis and the fall in housing values threaten to make a dent in consumer confidence.
All these data have reinforced in recent days the idea that the Chinese economy is finding it difficult to maintain the vigor of the start of the year, after a first quarter of strong growth with the lifting of Covid restrictions and the return of consumers to the shops and to spend on services.
According to Citi, so far in May food prices continue to fall, fuel prices remain moderate and the unemployment rate is high, especially among young people, a fundamental segment for boosting consumption and goods and services. “We expect CPI inflation to remain fairly low in May, although it could pick up to 0.3% year-on-year due to a lower base,” Nomura experts say in a note. Given the low figures for both inflation and producer prices, “we believe that the probability of a central bank cut in interest rates has been increasing, although it is not our reference case.”
For now, analyst forecasts remain strong for the year as a whole. Moody’s raised its expectations for the economy in March, expecting China’s real GDP growth of 5% for both 2023 and 2024, up from 4% previously forecast.
“Despite the signs of economic recovery in China, the country continues to face challenges, especially in the form of a contraction in the real estate sector,” say experts from the Global Data consultancy. “China will continue to face weakening domestic demand and sluggishness in the labor market, and greater political support is much needed,” they point out from Macquarie Capital.
In addition to weakening domestic demand, there are geopolitical risks, especially associated with escalating tensions in the South China Sea as well as tense relations with Taiwan and growing disparities with the West, Nomura adds. All of this “may have an impact on investor sentiment”.
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