China Q2 makes (anticipated) dive

China’s GDP decline by 2.6% q/q no wonderbut still undesirable:

Figure 1: China Real GDP Q1 2019 = 1 (black), April IMF World Economic Outlook (light blue square), Deutsche Bank May 17 (light green), Bloomberg Economics May 20 (pink triangle) . ECRI-determined recession dates are shaded in grey. Source: NBS via, IMF, Deutsche Bank, Bloomberg Economics, ECRI and author’s calculations.

As I noted three months ago, both Goldman Sachs (not shown above) and Deutsche Bank anticipated a sharp drop, partly due to government zero covid policy and the deterioration of the real estate sector.

Garcia Herrero and Xu in Natixis (7/15) note:

Looking ahead, we expect the Chinese economy to fare slightly better in 2H 2022 as reopening measures ease, but weak GDP performance in 1H 2022 makes it difficult to meet the government’s initial growth target of 5.5%. We expect the Chinese government to revise it downward. Given the information so far, we maintain our full-year growth forecast at 3.5% for 2022, but some associated downside risks remain. First, the pandemic continues to evolve with new infectious variants, namely BA.4 and BA.5, which could create additional challenges for China in containing the spread of Covid. Second, the sluggish real estate market sees no signs of recovery. If anything, it’s getting more complicated as problems move from developers to households and, through their mortgages, potentially to banks. Finally, the global economic environment is deteriorating very rapidly as the chances of a global recession are rising, with particular focus on the US due to inflation and a very aggressive Fed policy, and Europe due to the war in Ukraine and high energy prices.

For now, a resumption of growth seems clear in the forecast data:

Source: Natixis, July 15, 2022.

News of China’s growth problems has clear implications for the global economy. From Reuters:

Weak data on Friday fuels fears of a global recession as policymakers raise interest rates to curb skyrocketing inflation, putting more pressure on consumers and businesses around the world as they grapple with issues related to the Ukraine war and supply chain disruptions .