China’s recovery blueprint
Investors are particularly sensitive to the economic and health data emerging from China at the moment. The country’s numbers have greater significance because not only is it the world’s second largest economy, it is also the first major state to emerge from containment measures. The nation can be seen as a blueprint for the pattern of other countries easing restrictions and a gauge of the speed of recovery that can be expected.
On the up
China’s activity numbers for May demonstrated widespread improvement, although the headline numbers fell short of many economists’ expectations.
The strongest components of the recovery continue to be industrial production and infrastructure investment. Industrial output rose 4.4% from a year earlier in May, led by a rebound in car manufacturing (volume growth of 19% year on year (y/y)) and a continued positive performance from technology. Infrastructure investment surged 11% y/y in May, driven by local governments using special bonds to fund projects.
Household consumption is becoming a much more important element of growth for the Chinese economy. Retail sales continued to contract in May, by -2.8% y/y. However, that was significantly better than the -7.5% y/y decline in April. The improvement was generated by increased demand for cars and a pickup in discretionary sales.
Domestic demand is also being supported by faster online purchases. Online sales grew at 20.8% y/y in the month, surpassing the growth rate seen at the end of 2019.
Shape of the recovery
The data from China highlights the expected shape of the recovery. Manufacturing has rapidly returned to near pre-pandemic levels as factories reopen and supply chains improve. Vast amounts of fiscal stimulus is also supporting activity.
The more difficult task for policymakers is to encourage consumer demand against the backdrop of labour market uncertainty and restrictions that infringe on the traditional shopping experience.
A controlled lifting of restrictions should help to alleviate some the economic pressure; however, activity will continue to be vulnerable to any material second wave of COVID-19. A true return to normal activity levels will probably only occur when a vaccine has been developed. Given the time required to develop, test and distribute, a vaccine it is unlikely to be widely available in the next 12 months.
With the tentative reopening of economies and the vast level of stimulus instigated by policymakers, a significant recovery in 2021 is expected. That said, risks to this scenario include a surge in new infection rates, inefficient execution of policy measures and rising trade tensions between the US and China.
However, some sectors (such as airlines, hospitality and retail) may take longer to recover. Working patterns, supply chains and global trade are also likely to be permanently changed.
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