COVID-19 lockdowns hit the Chinese economy

Economic releases this week point to widely different growth momentum in the global economy. Chinese activity data for April were much weaker than expected with retail sales dropping 11.1% y/y and industrial production down 2.9% y/y. The weak batch of data points to a negative q/q growth rate in GDP in Q2 and also suggests downside risk to our 4.7% growth estimate for this year. The government’s 5.5% target will require a significant amount of stimulus, which China does not look prepared to provide. The credit impulse was slightly weaker in April, pointing to moderate stimulus.

A key driver of the weak Chinese data has been the outbreak of Covid-19 and the lockdowns by the Chinese authorities implemented to maintain their zero-Covid policy. While Shanghai is improving challenges persist in other cities such as Beijing and surrounding areas. The continued outbreaks highlight the difficulty in keeping Omicron contained and warns of more future lockdowns and supply chain disruptions.

On a more positive note, US data released this week showed quite resilient private consumption and industrial production despite geopolitical uncertainty and rising inflation. US retail sales data grew quite strongly in April both in nominal and real terms (taking into account the rise in inflation). At the same time, industrial production was also stronger than expected and capacity utilisation increased further to 79%. This week Fed Chair Jerome Powell said that interest rates will rise until there is “clear and convincing” evidence that inflation is retreating. Global risk appetite remains fragile amid the imminent US monetary policy tightening and weakening Chinese outlook with global equity markets seeing a significant setback this week.

In the euro area, inflation pressures are also broadening as headline and core inflation in April rose 7.4% and 3.5% compared to a year earlier. Especially service price inflation jumped higher in April due to a seasonal rebound in transport and recreational services, but also other services categories continue to rise. Rising input costs are still working their way through the consumer pricing chain. The continued building of underlying inflation pressures leaves little room for complacency from ECB, where we expect a 25bp hike at the July meeting.

This week, Finland and Sweden officially applied for NATO membership amid the Russian invasion of Ukraine. However, the application ran into problems as Turkey voiced opposition to Swedish and Finnish membership given concern about the countries’ stance on the Kurds. Meanwhile, Russian president Putin said that were Sweden and Finland to join NATO it would “certainly provoke our response”.

There will be plenty of data to absorb for markets over the next two weeks. In the US, a key focus will be the FOMC minutes on 25 May, personal consumption expenditures on 27 May (not so much on the inflation component as we got the CPI already but more the consumption). The jobs report on 3 June will also be very important. In the euro area, the PMIs on 24 May will be key along with the May flash CPI on 31 May, as well as the EU leaders summit on 30-31 May, where an energy embargo will be high on the agenda.

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