China’s industrial output is weakening. What does that mean for the East Asian giant and the world?
China’s industrial output disappointed market observers and experts, pointing to a growth lag for the world’s second-largest economy and biggest manufacturer. China is still embattled in its largest real estate crisis ever and a crippling deflationary wave, hampering growth and investments.
Data released on Monday by the National Bureau of Statistics (NBS) revealed a 5.6% growth in industrial output in May. The figure pales against the 6% growth expected by Reuters-polled economists and the 6.7% measure reached in April.
Fixed asset investment rose 4%, down from 4.2% in the first quarter. Private investment fared even worse at 0.1% growth, showing an overall slowdown of economic activity in the East Asian giant.
Manufacturing investment was the only sector that sustained robust growth. Factory output in May increased by 9.6%, underpinned by a renewed focus on electric vehicles, lithium-ion batteries, and solar panels. China is now the world’s largest producer of these products and began exporting them en-masse this year.
Retail sales also grew more than expected, rising 3.7% compared to the 2.3% forecast. Still, it’s not a big enough value to prove an overall rise in Chinese consumer confidence. "May activity data and our high-frequency trackers for the first half of June suggest significant cross-sector divergences remain in the economy - strong exports and manufacturing activity, relatively stable consumption, and still-depressed property activity," a Goldman Sachs analyst said, as reported by Reuters.
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High exports, low imports
China’s GDP grew more than expected in the first quarter to 5.3%. This measurement led the International Monetary Fund (IMF) to raise the 2024 growth forecast to 5%, in line with Beijing’s self-imposed goal.
The massive economic growth in the first part of the year was mainly driven by high export activity. China is the world’s largest exporter, but its sales abroad slumped in 2023 amid low international demand and weak post-COVID recovery.
The better-than-expected exports in 2024 helped China maintain sustained growth so far.
At the same time, imports have consistently been lower than expected, signaling weak domestic demand. That’s mostly correlated with the country’s severe real estate crisis, which brought housing demand to its lowest level in decades. At the same time, China’s deflation also depletes Chinese consumers from any meaningful purchasing power.
Annual inflation remained consistently below 0.5% for years. According to most of the world’s central banks, healthy inflation growth is sustained at or around 2%.
It’s unclear whether China could achieve its growth target with exports alone. In any case, its industrial decline will impact the global economy in ways no one can predict.
