China Macro: Real GDP growth back to almost 8% yoy in Q2 – On Thursday morning, China’s real GDP growth in Q2 came in slightly below expectations including ours, at 7.9% yoy (consensus: 8.0%, Q1: 18.3%). The drop in annual growth from Q1 is purely driven by base effects. Quarterly growth rose to 1.3% qoq (consensus: 1.0%), close to our expectation. That was up from a downwardly revised 0.4% qoq in Q1, when regional lockdowns and a renewed tightening of mobility restrictions formed a drag around the Lunar New Year break. Meanwhile, the monthly activity data for June published today surprised to the upside. In particular, retail sales did better than expected at 12.1% yoy (consensus: 10.8%, May: 12.4%), after disappointments in previous months. This looks partly related to the ramping up of China’s vaccination programme since the start of Q2, with a daily average of 20 million Chinese receiving a single dose in June.
Ramp up in vaccinations should help (services) consumption – Although the effectiveness of the vaccines used in China is reported to be lower than those used in the West, the progress with the vaccination roll-out should help the gradual recovery of (services) consumption to gain traction. We think the latest data will – together with strong June exports – help to reduce fears of a sharp slowdown, that had flared up here and there following weak June PMIs, falling credit growth and a recent easing step by the PBoC. We leave our annual growth forecast for the whole of 2021 unchanged at 9.0% for now, and would again emphasise that this relatively high growth pace is mainly driven by the strong base effect in Q1. Quarterly growth will be much lower on average this year than in the last three quarters of 2020, as catch-up effects from the pandemic shock fade.
Producer prices stabilise in June – Meanwhile, after accelerating sharply in recent months (to a post-global-financial-crisis high of 9.0% yoy in May), producer price inflation (PPI) – released last Friday – showed signs of stabilising in June, dropping slightly to 8.8% yoy. This was to be expected given the government measures to contain the surge in commodity prices (the key driver of the PPI rise). Easing food prices and base effects also play a role. Earlier this month, the respective subindices of the manufacturing PMIs for June had already signalled an easing of cost-push inflation in China. Taken together, this should calm some of the fears over a rising contribution from China to global goods inflation. Meanwhile, headline CPI inflation dropped back to 1.1% yoy in June (May: 1.3%), while core inflation was stable at 0.9% yoy. This confirms that there is hardly any pass-through from higher cost prices to consumers. All in all, the latest inflation developments have created room for the PBoC to add targeted support, as illustrated by the recent 50bp RRR cate to ease financing costs for corporates, in particular SMEs.
For more background, also see our update China’s GDP growth humming along published yesterday.