A Rebound in China Q2 GDP?

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Early tomorrow (or very late tonight, depending on where you are,) we get what might be the most anticipated data of the month: official data on the economic recovery following the COVID outbreak in China.

There are a lot of expectations for China. Especially since they recently managed to control an outbreak in Beijing. And after posting the first quarterly GDP contraction since, they began publishing the data.

The key to the impact on the markets is the ratio of growth compared to contraction in the prior quarter.

If the result doesn’t meet expectations, we could see risk sentiment shutting off as investors anticipate a rockier road ahead.

If the data beats expectations, we expect the risk sentiment that has faltered over the last couple of weeks due to increasing case numbers around the world, to strengthen.

What We Are Looking For

There are several bits of data coming out at the same time, including retail sales and industrial production. But the key data to focus on here is the quarterly change in GDP.

Projections indicate that it will come in at +9.6%, compared to -9.8% in the prior quarter. This would leave the GDP less than 0.5% lower than it was before the virus outbreak. Above 10.9% growth would be full recovery. 

Last quarter registered the first annualized decline in GDP since records began in China. For the second quarter, annualized GDP growth is projected at 2.1% compared to -6.8% prior. This is a far cry from the 6.1% growth registered last year.

However, it would confirm expectations that China will be the only major economy to grow this year. Chinese economic growth is vital for a rebound in other regional economies.

Other Indicators of Green Shoots

June saw a significant improvement in trade with China, as the country’s partners also began to lift COVID lockdowns. Imports grew for the first time this year, thanks in large part to heavy stimulus spending to support the domestic market.

China’s industrial sector recovered relatively quickly from the lockdowns, but the smaller domestic-facing services businesses haven’t been so lucky.

That’s why tomorrow we also want to pay attention to monthly retail sales data, which comes out at the same time.

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Retail sales have yet to return to positive, even though it’s been months since the lockdowns in Hubei have been over. This could be an important factor weighing on GDP growth.

It could also explain why GDP figures might not meet expectations.

Projections indicate that retail sales for June will finally return positive at just 0.3% growth, compared to -2.8% in May. This is still far away from the usual ~8% annualized growth before the pandemic.

This suggests that the Chinese economy is still far from recovered. A worrying sign for most investors is that the rest of the world is at least a month behind China in the recovery cycle.

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