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Economy

China regains 1.1% GDP growth in Q2 on production rebound: Nikkei survey

Full-year estimate lowered to 1.6% as export headwinds and COVID-19 weigh

Chinese economy likely expanded in April-June period but recovery is far from a V-shaped rebound.    © Reuters

HONG KONG -- China's economy likely expanded 1.1% in the April-June period on a recovery in production and consumption, rebounding from a 6.8% contraction for the previous quarter during the peak of coronavirus cases in the country, according to the consensus of economists surveyed by Nikkei and Nikkei Quick News.

Estimates for the second quarter of 2020 ranged from negative 5.2% to positive 3.6%, with 22 of 26 economists who answered this question projecting growth.

Qun Liao, chief economist at China CITIC Bank International, forecast a 1.9% increase in real gross domestic product, saying that rising supply caught up with demand while leeway on monetary and fiscal policies propped up growth.

Tommy Wu, lead economist at Oxford Economics, forecast 1.5% growth.

"We expect the economy to continue to recover from the second quarter onwards, mainly led by industrial production and investment," Wu said.

China has contained an explosion in COVID-19 infections through strict lockdowns, resuming economic activities ahead of the U.S. and European countries.

"Industrial production, fixed asset investment and services-sector output have all resumed growth by May," said Aidan Yao, senior emerging Asia economist at AXA Investment Managers.

A rise in materials prices and a recovery in sales of construction machinery testify to a pickup in domestic demand, said Cheng Shi, chief economist at Industrial and Commercial Bank of China International, adding that growth firms up "in every quarter."

But the recovery is far from a V-shaped rebound. The average forecast of full-year growth for 2020 came to 1.6%, down from 3.3% in the previous survey in March.

"We cut our 2020 China growth forecast from 3.0% to 2.0%," said Arjen van Dijkhuizen, senior economist at ABN AMRO Bank, noting that "external headwinds have risen."

Sophie Altermatt, economist at Julius Baer, took the global economic slowdown into consideration.

"We believe that China will face increased headwinds in the export sector in the coming months," Altermatt said.

Economists remain worried about a possible "second wave" of coronavirus cases in China. Widespread infections may return, hindering economic recovery, said Fan Xiaochen, director of Mitsubishi UFJ Financial Group's Economic Research Office (Hong Kong).

China's GDP could contract as much as 1.2% in 2020, said Jian Chang, chief China economist at Barclays Asia Pacific. She cited "a potential further escalation in Sino-U.S. trade or financial tensions as a major downside risk for growth."

Asked when they expected Chinese economic activity to return to normal, 32% of respondents predicted the July-September quarter while 41% forecast the October-December period. Only 14% said it had already normalized during April-June.

"About 90% of the workforce is already back to work," said Sean Taylor, Asia-Pacific chief investment officer at DWS. "Car demand has also returned back to pre-crisis level. Even hard-hit sectors such as domestic flights and hotel occupancy rates are only 20% below pre-crisis level."

But Moody's Analytics economist Xu Xiaochun offered a reserved forecast for 2021 due to the heavy losses this year.

China "most likely will need to wait for vaccine to be available before the speed can return to a sustainable pre-COVID growth path," Xu said.

Many economists warned that deteriorating employment will harm consumption as income declines. Given choices to select the effect of the coronavirus pandemic on China's economy, many picked an "increase in unemployment" or "decline in consumption."

Shen Jianguang, chief economist at JD Digits, said the pandemic has hit private and small to midsize companies hard, causing a "very strong downward pressure on employment in the short run."

The Chinese economy relies greatly on domestic demand, especially consumer spending, said Xie Yaxuan, chief macroeconomic analyst at China Merchants Securities. The analyst said a rise in the unemployment rate has lowered income expectations and weakened consumer demand.

"As differences in competitiveness before the COVID-19 outbreak will become more evident, financially weak companies will tend to default on their obligations," said Mihoko Hosokawa, research executive at Mizuho Bank (China). "Liquidation and shakeout of businesses will advance."

With U.S.-China trade frictions spreading to technology and finance, development of advanced tech will drag, said Paul Tang, chief economist at the Bank of East Asia. Tang added that "the ability of Chinese firms to find offshore funding will be weakened."

The unemployment rate in China's official statistics has been called into question. The rate came to 5.9% in May, up slightly from 5.3% in January. Experts note that the survey is limited to urban areas and does not include workers who have returned to rural villages after failing to find jobs.

Economists in the survey put the real jobless rate between 8% and 23%. Kevin Lai, chief economist at Asia ex-Japan of Daiwa Capital Markets, gave an estimate of 20%.

"Self-employed workers and rural migrant workers are heavily impacted by the coronavirus outbreak," he said. "The official unemployment rates may not fully reflect these influences."

"If a situation of not working is simply defined as unemployment, the rate stood at about 50% in February, is 10% or so at present and will drop to 7% to 8% at the end of this year," said Tetsuji Sano, chief Asia economist at the Asia Research Center of Sumitomo Mitsui DS Asset Management (Hong Kong).

The economists who responded to the survey were: Arjen van Dijkhuizen, senior economist, ABN AMRO Bank; Aidan Yao, senior emerging Asia economist, AXA Investment Managers; Ricky Choi, principal economist, Bank of China (Hong Kong); Paul Tang, chief economist, Bank of East Asia; Jian Chang, chief China economist, Barclays Asia Pacific; Chen Xingdong, chief China economist, BNP Paribas; Qun Liao, chief economist, China CITIC Bank International Limited; Xie Yaxuan, chief macroeconomic analyst, China Merchants Securities; Kevin Lai, chief economist, Asia ex-Japan, Daiwa Capital Markets; Chris Leung, chief China economist, group research, DBS Bank (Hong Kong); Sean Taylor, Asia-Pacific chief investment officer, DWS; Francoise Huang, senior economist for Asia-Pacific, Euler Hermes; Kenny Wen, wealth management strategist, Everbright Sun Hung Kai; Thomas Shik, chief economist, head of economic research, Hang Seng Bank; Qu Hongbin, co-head of Asian economics and chief China economist, HSBC; Cheng Shi, chief economist, Industrial and Commercial Bank of China International; Iris Pang, chief economist, Greater China, ING Bank; Shen Jianguang, chief economist, JD Digits; Tommy Wu, lead economist, Oxford Economics; Ding Shuang, chief economist, Greater China and North Asia, Standard Chartered Bank (Hong Kong); Tetsuji Sano, chief Asia economist, Asia Research Center, Sumitomo Mitsui DS Asset Management (Hong Kong); Wang Tao, head of Asia economics, chief China economist, UBS Investment Bank; Sophie Altermatt, economist, Julius Baer; Ken Chen, Chinese economy analyst, KGI Asia; Larry Hu, head of China economics, Macquarie; Mihoko Hosokawa, research executive, Mizuho Bank (China); Xu Xiaochun, economist, Moody's Analytics; Fan Xiaochen, director of the Economic Research Office (Hong Kong), MUFG; Xu Jianwei, senior economist, Natixis; Ting Lu, chief China economist, Nomura.

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