China's economic data disappoints in May as consumer spending lags

China’s main economic data missed estimates in May as the recovery continues to stabilize from the first quarter’s record expansion, with retail spending still lagging expectations.

Industrial output rose 8.8% in May from a year earlier, below the 9.2% forecast by economists in a Bloomberg survey. Retail sales increased 12.4% versus an estimate of 14%. Fixed-asset investment increased 15.4% in the first five months of the year from the same period in 2020. The unemployment rate eased to 5% in May from 5.1% in the previous month.

On a two-year average basis, which strips out the impact of last year’s pandemic, industrial production rose 6.6% in May, while retail sales grew 4.5%. Manufacturing investment rose 0.6% in January-May on this basis, after four previous months of declines.

The recovery from the pandemic has been led by heavy industry, property and an export boom, with consumer spending remaining the weak link -- and therefore the key to a more sustainable growth outlook. While spending is picking up gradually as vaccine rollouts accelerate and the labor market improves, the latest holiday spending figures suggest consumers are still holding back on purchases.

“The consumption recovery has not been as strong as people have been hoping for,” said Michelle Lam, Greater China economist at Societe Generale SA. The recent virus outbreak in the southern province of Guangdong “adds further risk to the recovery,” she said.

Policy Outlook

Tourism spending during the recent Dragon Boat Festival long weekend was about 25% lower than pre-pandemic levels, according to government data. During the Labor Day break in May, the number of travelers rose slightly but spending was still only 77% of the level reached two years ago.

“The robust industrial production is mostly driven by external demand, while domestic demand still hasn’t recovered to pre-pandemic levels,” said Ding Shuang, chief economist for Greater China at Standard Chartered Plc. “Policy makers will be more cautious with the pace of policy normalization.”

He expects the People’s Bank of China to inject liquidity into the interbank market in the next month to ease upward pressure on interest rates as the economic recovery still remains unbalanced. The slowdown in credit growth is also likely have peaked in May, he said.

What Bloomberg Economics Says...

China’s May activity wasn’t as weak as the year-on-year readings indicate. Yes, they all undershot expectations. Compared with April, though, the two-year compound growth rates for fixed asset investment and retail sales picked up. The pace of production slowed -- driving home the message that the economy is past its rapid-recovery stage.

David Qu, China economist

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China’s stock trading closed just as the data were released. The CSI 300 Index fell 1.7% on Wednesday, the most in two months, with health care, information technology and materials sub-gauges all losing 3%.

NBS spokesman Fu Linghui told reporters that growth is still unbalanced, and even though employment is improving, new graduates are still having difficulty in finding jobs and businesses face challenges in recruiting workers.

Still, the contribution of consumption to growth is rising, said Fu. “As the economy gradually recovers, economic growth is gradually returning to the normal state of being driven by domestic consumption,” he said.

Port Disruptions

Upstream industries, like mining and raw material producers, are benefiting from surging commodity prices, while exporters of manufactured goods are still seeing strong overseas demand.

There are risks that are weighing on the sector though. China is experiencing power shortages in some parts of the country because of surging electricity consumption and drought in the south, which has curbed hydro-power, prompting factory closures. A fresh outbreak of Covid-19 at Yantian port in Shenzhen is also causing congestion to container traffic, further disrupting global supply chains and driving up freight costs.

The Guangdong outbreak has halted port operations and limited the movement of people, and it’ll likely continue to affect the incoming data in June, according to Iris Pang, Greater China chief economist at ING Bank NV in Hong Kong. “Covid-19 should have been under control now. We should have a better set of data from July,” she said.

Economists expect China’s economy to gradually moderate this year from 8% in the second quarter to 6.2% in the third quarter and 5% by the final three months of the year. Growth is still expected to reach 8.5% for the full year, easily topping the government’s target of ‘above 6%.’