China – May activity data

Official data show IP jumped +5.6% MoM in May, almost reversing the -5.8% MoM fall in April. Retail sales also grew MoM, but only marginally, and remain well below the Q1 level. Consistent with the weakness in the construction PMI, property indicators showed no real improvement last month. Starts ticked up MoM, but sales continued to fall.

Based on today's data and the services PMI, it looks like GDP might have grown a touch YoY in May. That is probably at least where underlying economic activity is tracking, and signifies, obviously, that the economy remains frail. Actual GDP numbers could, of course, come in higher; at a minimum, our tracker won't fully capture the impact of all the government spending on testing.

Policymakers are giving the impression that they think they've done enough, with the PBC refraining from cutting the MLF rate today. Absent another Covid-19 blowout, and it is indeed reasonable to expect further economic recovery, on the back of a natural pick-up in growth as lockdowns end, and as the modest policy support of the last couple of months kicks in.

But there aren't signs of a vigorous bounce in the economy, with at least three significant risks clouding the outlook. Beijing and Shanghai continue to struggle with covid numbers that are low, but not low enough to call the all-clear. The property market continues to contract, and if that can't be reversed, the growth trajectory for the whole economy will be impaired. Finally, the trend in retail sales and consumption continues to be much lower than pre-2020.

As with property, a rise in consumption growth rates will be necessary if the economy is to return to 5% growth rates. From a structural perspective, it is also worrying that the gap between IP and retail sales is once again widening. That isn't helpful for putting the economy on a sustainable footing.