On July 16th the National Bureau of Statistics reported that real GDP grew by 3.2% year on year in April-June 2020, a significant improvement from the 6.8% contraction in the first quarter. In seasonally adjusted, quarter-on-quarter terms, real GDP rose by 11.5%.
The data aligned with our expectations, which estimated a real GDP increase of 3% year on year in April-June.
The second-quarter data highlighted a strong improvement in the industrial sector, with real value added in the secondary sector increasing by 4.7% year on year. The recovery was partly underpinned by pent-up demand in the domestic market and the clearance of a backlog of overseas orders. The easing of economic restrictions and social distancing measures across most of China’s major trade partners helped to support export orders towards the end of the quarter.
The improvement in services, however, was much weaker, with real growth in tertiary sector value added reaching only 1.9% in the second quarter. Although the lifting of quarantine and social distancing policies supported a recovery in transportation services, the retail sector remains the principal drag on services output, with retail sales of consumer goods and catering services contracting in value by 8.1% and 26.8% respectively in the first half of the year. The risk of local coronavirus outbreaks, such as that in mid‑June in the capital, Beijing, remains a dampener on consumer confidence. These factors offset the likelihood of a stronger performance in information technology services and financial services.
Continued normalisation and stimulus measures will help to build more economic momentum in the third quarter. More improvement will be recorded in the tertiary sector, as the reopening of domestic tourism sites, cinemas and entertainment services will boost transportation and consumer-facing businesses. Construction activity will gain more steam as local governments use their expanded bond quotas to fund infrastructure investment.
However, the industrial recovery faces downside risks. Levels of production exceeded demand in the second quarter, indicating an oversupply of goods that could dampen future production activity. Meanwhile, while external demand should strengthen in the third quarter, the onset of a second or third wave of the coronavirus would forestall the global recovery.
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The data support our existing forecast of real GDP expansion of 1.4% in 2020 as a whole. We estimate that growth will accelerate in the third and fourth quarters to 4.1% and 5.3% respectively.
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