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China — Nascent signs of industrial recovery despite downside risks

Officially reported data show decisive prevention and control measures have been successful in stalling COVID-19 cases in China while the pathogen continues to escalate rapidly across the rest of the world (Chart). As such, while China’s GDP contracted 6.8% in Q1 2020—the first annual decline in four decades—the economy is entering a reopening phase and there are tentative signs the country is gradually getting back to work. China’s industrial output rose by 3.9% y/y in April—the first increase since the COVID-19 outbreak. Fixed asset investment fell 10.3% in the first four months of 2020, an improvement on the 16.1% first quarter drop. Public investment is outperforming private investment; the former fell 6.9% y/y in the first four months of the year, compared with 13.3% for the latter. Daily coal consumption is reportedly down to 90% of the level seen in the past three years.

But China’s outlook is facing downside risks. First, demand for China’s exports will face continued pressure as major trading partners grapple to contain COVID-19, while pre-existing trade tensions could flare in the run up to the US Presidential election. Second, reopening the economy carries the risk of a second wave of infections. Further, while the industrial economy is showing early signs of recovery, consumers remain cautious. Retail sales continued to fall in April while the urban unemployment rate edged higher to 6%. While sales of commercial vehicles surged by over a third, passenger vehicle sales fell by 6% y/y in April. Increased sales of trucks and diggers pre-empted new government stimulus, equivalent to around 4% of GDP, announced on 22 May. Stronger infrastructure investment and a sustained recovery in industrial production would provide a floor underneath commodity demand and may lead to substantial opportunities for Australian exports, despite the slow consumer recovery.

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