As measured by recent data, China’s economy has either rebounded strong in May or better held up than expected. Headline export growth has greatly slowed due to a high base effect. The two-year CAGR for exports has probably accelerated, due in large part to a rebound in trade flows to the United States. This is a very positive omen trend, showcasing the resilient recovery trajectory of China’s economic environment even amid headwinds.
The economic signs for May are a mixed bag. There was strength in real activity when looking on a two-year CAGR basis. First, the CPI consumer price index index CPI deflation deteriorated. This was a rise of 0.1 percentage points from -0.3% year-on-year in the previous month, peaking at -0.2% YoY. The drop in prices was due mainly to falling costs in food, services, and energy.
China’s factory output accelerated to a year-on-year increase of 6.4% in May. This increase is a hopeful sign of improving conditions in the national manufacturing and production sectors. The official manufacturing Purchasing Managers’ Index (PMI) ticked up a bit in May. It rose to 49.5, increasing from 49 in the month of April. Kenneth Schumann, a market analyst, states that this increase can be credited to the recent US-China tariff truce agreed upon in mid-May, which has boosted US market sentiment.
“While headline export growth may have slowed due to a high base, the 2Y CAGR likely accelerated on a recovery in trade flows to the US.” – Standard Chartered’s economists
While the growth of headline exports has started to slow, the two-year CAGR paints a much prettier picture for the future of international trade. As analysts pointed out, a large part of this acceleration can be attributed to the recovery in trade flows to the US.
We’ve had what we all know has been a very accelerated growth rate in retail sales over the last two+ years. This increase was fueled in part by a holiday surge and a consumer goods trade-in campaign. These initiatives have been great for browsing and incentivized spending as well, helping to fuel the impressive double-digit increase in sales figures.
The deflationary pressures currently experienced by China have many economists worrying. Second, the CPI deflation worsening to -0.2% year-on-year is an alarming signal pointing to new headwinds to consumer spending and overall economic growth. The recent drop in food, core services, and fuel prices has played an important role in driving this trend.
“CPI deflation likely worsened 0.1ppt to -0.2% y/y in May on a m/m decline in food, services and fuel prices.” – Standard Chartered’s economists
The producer price index (PPI) deflation deepened to -3.3% YoY. This amendment draws attention to the falling prices of oil related products and metals. The recent collapse in overall commodity prices pushed us deeper into the deflationary well.
Despite these challenges, China’s economy remains resilient. That, along with the speeding up of industrial production and retail sales, just goes to show that consumer demand is as strong as ever. These two factors combined point to a tough time ahead for export growth. At the same time, many other sectors of the economy are seeing strong positive momentum.
“The official manufacturing PMI edged up to 49.5 in May from 49 in April, benefiting from the US-China tariff truce reached in mid-May.” – Standard Chartered’s economists