China achieved a small positive year-on-year growth in the second quarter of this year thanks to a sharp rebound of economic activity in June. The second quarter GDP growth of 0.4 percent year-on-year is broadly in line with our expectations.
Growth in the second quarter, however, was slower than in the first quarter (4.8 percent year-on-year). Nevertheless, it was a good result considering the large-scale disruptions from the sporadic novel coronavirus outbreaks, especially of the Omicron variant, in April and May.
The positive growth in the second quarter was largely due to an expanding industrial sector (0.9 percent year-on-year). Using monthly activity indicators, we estimate that GDP growth rebounded to 3.3 percent year-on-year in June from-2 percent in April and-0.5 percent in May in line with what we observed from high-frequency mobility and activity indicators.
Retail sales were lifted by dining and auto sales recovery, with retail sales growth jumping to 3.1 percent year-on-year in June from-6.7 percent in May. Auto sales were particularly strong, growing 14 percent year-on-year, but that could be owing to delays in purchases from April and May post-resumption of auto production. And the dining sector recovered as dining restrictions were lifted.
The manufacturing sector continued to outperform the service sector as industrial production growth improved to 3.9 percent year-on-year in June from 0.7 percent in May, not far from its growth rate before the sporadic Omicron outbreaks. Subsectors that achieved double digit growth include autos (16 percent), computer and electronics (11 percent), and coal mining (11 percent). Services activity growth, however, was slower at 1.3 percent year-on-year in June－which nevertheless is a big improvement from－5.1 percent growth in May.
Infrastructure investment growth rose to 12 percent year-on-year in June from 8 percent in May on the back of strong policy support, including an acceleration of local government special bond issuance－bonds worth 1.5 trillion yuan ($222.11 billion) were issued in June－and fresh 300 billion yuan funding from policy banks. Thanks to these fundings, infrastructure investment growth will likely stay high in the next few months.
Manufacturing investment growth, too, improved to 9.9 percent in June from 7 percent in May.
However, further policy support is needed to strengthen recovery. China's economic recovery is not yet strong as consumer sentiment remains weak owing to income and job uncertainties. And in the absence of further policy support, there would be no guarantee that recovery can stay on a steep slope in the coming months.
China's top leadership may soon meet to review the economy's performance in the first half of the year and shed light on the policy for the second half. Most of the government's announced policies thus far have been short-term in nature, so if there are no further policy announcements, fiscal policy might soon hit its annual budget constraints and debt ceilings.
We think it is necessary for the government to revisit its annual fiscal stance and plan for additional bond issuances.
The author is chief China economist of Deutsche Bank.
The views don't necessarily reflect those of China Daily.