May saw a downturn in China’s economy as both industrial output and retail sales growth fell short of expectations. This raised concerns that Beijing would need to do more to support the wobbly post-pandemic recovery.

The economic recovery that began this year has slowed in the second quarter, leading China’s central bank to lower some important interest rates this week, with projections for further reductions.

The National Bureau of Statistics (NBS) said on Thursday that industrial output increased 3.5% in May compared to a year earlier, which was slower than the 5.6% rise in April and slightly below the 3.6% gain predicted by analysts in a Reuters poll. Manufacturers continue to struggle with sluggish demand at home and overseas.

Retail sales, a significant indicator of consumer confidence, increased by 12.7%, falling short of predictions for growth of 13.6% and declining from April’s 18.4%.

“All the data points so far sent consistent signals that the economic momentum is weakening,” said Zhiwei Zhang, president of Pinpoint Asset Management.

For the second-largest economy in the world, data ranging from factory surveys and trade to loan growth and home sales, have indicated signals of deterioration. According to NBS estimates, daily coal production decreased from April through May, while crude steel output continued its year-over-year and month-over-month declines.

Given comparisons to last year’s extremely poor performance, when many cities were subject to stringent COVID lockdowns, the soft run of data has confounded analyst expectations for a stronger pickup.

As China deals with deflationary threats, rising local government indebtedness, record youth unemployment, and declining global demand, the numbers further support the need for additional intervention.

“Insufficient domestic demand and sluggish external demand could interrupt the momentum in the ongoing months, leaving China with a more gradual U-shape recovery trajectory on its month-on-month growth path,” said Bruce Pang, chief economist at Jones Lang LaSalle.

According to Pang, the first move would be to introduce stimulus through extensive policy relaxation. However, it might take two to three years to support a faltering economic recovery.

For the first time in ten months, China’s central bank lowered the interest rate on its one-year medium-term lending facility on Thursday. This paved the way for decreases in the benchmark loan prime rates (LPR) the following week.

Following the rate decrease, the yuan hit a new six-month low, and China’s stock markets advanced, with the benchmark CSI 300 index rising 0.6% and Hong Kong’s Hang Seng Index gaining 1.2%.

Markets are also placing bets on additional assistance, particularly actions aimed at the struggling real estate industry, which was once a major generator of GDP.

Analysts claim that more easing will be required despite Beijing’s officials’ caution in using forceful stimulus that could increase the danger of capital flight.

The largest banks in the nation recently lowered their deposit rates in an effort to boost consumer spending and relieve pressure on profit margins.

Although the easing by the central bank won’t change much on its own, Julian Evans-Pritchard, head of China at Capital Economics, said it reflects “growing concerns among officials about the health of China’s recovery.”

He noted that the economy is expected to perform worse than he had predicted in the second quarter and that additional policy support will likely be required to keep the economy from experiencing a fresh downturn.

Due to the low base effect from last year, NBS spokesman Fu Linghui stated at a press briefing that the growth in the second quarter was anticipated to pick up.

But he cautioned that there are obstacles to the recovery, such as “a complicated and depressing international environment,” “a sluggish global economic recovery,” and “insufficient domestic demand.”

Last week, PBOC governor Yi Gang promised that China would adopt countercyclical policy changes to support the economy.

While new home price growth halted, real estate investment plummeted in May at the steepest rate since at least 2001, falling 21.5% year over year.

According to Goldman Sachs analysts this week, the property industry, which has historically been a significant contributor to China’s economic growth, is projected to struggle for years with “persistent weakness.”

In contrast to the 8.4% growth in investment by state bodies, private fixed-asset investment fell by 0.1% in the first five months, indicating low business confidence.

The youth unemployment rate increased to a record high of 20.8%, adding to the labour market’s woes. In May, the nation’s survey-based unemployment rate remained at 5.2%.

(Adapted from Reuters.com)

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