Thought August 14, 2019 / 02:35 am UTC

China: Muted July Activity Points Toward Q3 Slowdown

By Jeff Ng

China’s economy slowed further in July compared to April to June. This poses downside risks to our 6.2% y/y GDP forecast in Q3, after the economy grew 6.2% in Q2. We see potential fiscal support should growth deteriorates further from current rates.

Key indicators’ performances fell significantly below market expectations, though it was closer to our expectations. This is in line with our China tracker which saw a broadened slowdown in July

This is a signal that growth numbers were officially supported in June and we continue to see headwinds for the economy ahead.

Industrial production grew at 4.8% y/y in July, from 6.3% prior, and was the weakest since 1990 (if we discount Lunar New Year distortions). Industrial production was weighed down by manufacturing (4.5% y/y), even as mining (6.6%) and electricity (6.9%) were more resilient. We observed heavy drags from autos, textiles, raw chemical materials and general equipment.

Meanwhile, retail sales growth (7.6% y/y) was dragged by weak demand for consumer goods (7.4% y/y from 9.9% prior). Demand for jewellery (-1.6% y/y), household electronics (3%), petroleum (-1.1%) and automobiles (-2.6%) were also poor. We are seeing some household austerity as the economic slowdown persists.

Fixed asset investment growth (5.7% y/y YTD) also slowed in July compared to June.

A minor concern is the rebound in the surveyed unemployment rate to 5.3% in July from 5.1% in June. This may have been inflated by seasonal factors.

Given the sluggish momentum, we expect the economy to continue performing poorly in August. Authorities remain comfortable with current trends but will likely intervene if growth weakens further. To us, it means industrial production with <4% y/y growth and/or retail sales with <7% expansion.

Figure 1: Growth Slowed Further in July (% y/y)

Source: CEIC, Continuum Economics

4Cast Ltd. and all of its affiliates (Continuum Economics) do not conduct “investment research” as defined in the FCA Conduct of Business Sourcebook (COBS) section 12 nor do they provide “advice about securities” as defined in the Regulation of Investment Advisors by the U.S. SEC. Continuum Economics is not regulated by the SEC or by the FCA or by any other regulatory body. This research report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nonetheless, Continuum Economics has an internal policy that prohibits “front-running” and that is designed to minimize the risk of receiving or misusing confidential or potentially material non-public information. The views and conclusions expressed here may be changed without notice. Continuum Economics, its partners and employees make no representation about the completeness or accuracy of the data, calculations, information or opinions contained in this report. This report may not be copied, redistributed or reproduced in part or whole without Continuum Economics’s express permission. Information contained in this report or relied upon in its construction may previously have been disclosed under a consulting agreement with one or more clients. The prices of securities referred to in the report may rise or fall and past performance and forecasts should not be treated as a reliable indicator of future performance or results. This report is not directed to you if Continuum Economics is barred from doing so in your jurisdiction. Nor is it an offer or solicitation to buy or sell securities or to enter into any investment transaction or use any investment service.
Analyst Certification
I, Kilbinder Dosanjh, certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.