China’s economy is clearly contracting sharply under the weight of “zero COVID” policies, even though Q1 GDP growth beat expectations and April data showed only a modest decline in industrial output. Consensus expectations have not fully factored in the degree to which China’s economy is weakening this year, or the probability that slower growth will extend into future years. As the gap between this economic reality and rosier expectations closes in the months ahead, we are likely to see significant downgrades to consensus views on global inflation, commodity demand, future carbon emissions, and both direct and portfolio investments in China.
China’s April macroeconomic data reveal that lockdowns and COVID-related restrictions are causing the economy to contract, with industrial value-added declining by 2.9% y/y last month, and retail sales dropping by 11.1%. While consumption is taking the first hit, production is likely to drop off further in the months ahead, given ongoing logistical disruptions to supply chains and declining new orders. Credit data were severely disappointing in April and indicate continued weakness in credit and investment demand. The most important indicators to watch from here concern how fast property sales and freight activity might recover if COVID restrictions ease soon.
Chinese corporate inventories of finished goods are accumulating rapidly, as a result of disrupted supply chains caused by lockdowns and other COVID-related restrictions. There is a widening gap between overall industrial production and final demand as China’s current slowdown extends, similar to the inventory buildup in Q2 2020. While supply chain disruptions are temporary and likely to contribute to both domestic and exported inflationary pressures, the medium-term trends caused by rising inventories are fundamentally disinflationary, both within China and for global raw materials prices.
