China’s economy showed signs of weakening in May as the growth of industrial output and retail sales slowed down, according to official data released on Wednesday. The slowdown puts pressure on the government and the central bank to step up stimulus measures to support the recovery.
The data came after the People’s Bank of China (PBOC) cut the interest rate on its one-year policy loans by 10 basis points to 2.65% on Tuesday, following a similar reduction in its short-term rates earlier this week. The PBOC has shifted to an easing mode in recent months, with economists expecting more monetary policy stimulus in the coming months, such as interest-rate cuts or reserve requirement ratio (RRR) cuts.
Industrial Output and Retail Sales Growth Slows Down
According to the National Bureau of Statistics (NBS), China’s industrial output rose by 8.8% year-on-year in May, down from 9.8% in April and below market expectations of 9.2%. The slowdown was mainly due to a high base of comparison from last year, when China’s industrial production rebounded sharply from the pandemic-induced slump.
China’s retail sales grew by 12.4% year-on-year in May, down from 17.7% in April and below market expectations of 14%. The slowdown was partly due to a resurgence of Covid-19 cases in some regions, which dampened consumer confidence and spending.
Other Economic Indicators Also Show Weakness
Other economic indicators also pointed to a loss of momentum in China’s recovery in May. For instance:
- Fixed-asset investment increased by 15.4% year-on-year in the first five months of 2021, down from 19.9% in the first four months and below market expectations of 16.9%.
- The urban unemployment rate edged up to 5% in May from 4.9% in April, indicating a sluggish labor market recovery.
- The consumer price index (CPI) rose by 1.3% year-on-year in May, down from 0.9% in April and below market expectations of 1.6%. The slowdown was mainly due to a decline in food prices, especially pork prices, which fell by 23.8% year-on-year.
- The producer price index (PPI) surged by 9% year-on-year in May, up from 6.8% in April and above market expectations of 8.5%. The surge was mainly due to rising commodity prices, which increased the costs for manufacturers.
Stimulus Measures Under Consideration
The weakening economic data has raised concerns about the sustainability of China’s recovery, which faces several headwinds, such as weak business and consumer confidence, a faltering property market, and slowing global demand for exports.
To counter these challenges, authorities are reportedly considering a broad package of stimulus measures to support areas such as real estate and domestic demand, according to people familiar with the matter. The State Council may discuss those policies as soon as Friday.
Some of the possible measures include:
- Increasing fiscal spending on infrastructure projects and social welfare programs
- Expanding local government bond issuance quotas
- Lowering taxes and fees for small businesses and households
- Relaxing property market restrictions and mortgage rules
- Boosting consumption subsidies and vouchers
- Encouraging innovation and green development
China’s economic recovery lost steam in May as growth in industrial output and retail sales slowed down, putting pressure on policymakers to step up stimulus measures. The central bank has already cut its policy rates twice this week, and more monetary easing is expected in the coming months. Authorities are also considering a broad package of fiscal and structural policies to support the economy amid various headwinds.