China’s economy has recovered from the COVID-19 outbreak, led by infrastructure investment and property construction, while household consumption has lagged. That rebound has been positive for heavy industry, but inventories have also played a significant role in GDP growth in Q2.
In this brief note, we break down China’s industrial inventory data and show that commodity-intensive upstream sectors are likely to reduce output in the second half of the year. Production in downstream sectors should pick up, but the sustainability of the recovery depends upon household consumption, which is still underperforming. On balance, cyclical activity in China’s economy is more likely to slow sequentially than accelerate in 2H 2020. That may be consistent with stable or slightly higher year-over-year GDP growth in Q3, before a deceleration in Q4.
