Downbeat China Factory Output, Retail Sales Add to Urgency for Stronger Stimulus

Sluggish Data Amplifies Worries Over Economic Outlook

China's factory output and retail sales posted their weakest readings in months in June, highlighting the extent of the economic slowdown and heightening the pressure on policymakers to unleash more stimulus measures.

Industrial Production Weakens

Industrial production rose just 3.9% year-on-year in June, a sharp deceleration from the 4.8% increase in May and well below the 5.0% forecast by economists. The figure marked the slowest growth rate since March 2020, at the height of the pandemic lockdowns.

The weakness was broad-based, with 17 of 41 surveyed industries reporting output declines. Key sectors such as automobiles, steel, and petrochemicals all saw production contract.

Retail Sales Slump

Retail sales, a key indicator of consumer spending, fell 1.8% year-on-year in June, marking the first decline since May 2020. The drop was much steeper than the 0.1% contraction forecast by economists.

The decline was partly attributed to the strict COVID-19 lockdowns and restrictions in major cities, which disrupted supply chains and kept consumers at home.

Policy Response

The disappointing data has raised concerns about the health of the Chinese economy and increased the urgency for stronger policy support. Economists expect the government to announce additional stimulus measures, including infrastructure spending, tax cuts, and monetary easing.

The People's Bank of China (PBOC) has already cut interest rates twice this year and reduced banks' reserve requirements to boost lending. The government has also announced measures to support the property sector, which has been a major drag on growth.

Outlook and Implications

The weak June data reinforces the view that China's economic recovery is facing significant headwinds. The government's zero-COVID policy, global supply chain disruptions, and geopolitical uncertainties are all weighing on growth.

The upcoming third-quarter GDP data will be closely watched for further evidence of the slowdown. Economists expect growth to slow further, and some forecasters have cut their projections below 4% for the year.

The weak data could also have implications for global markets. China is the world's second-largest economy and a major consumer of commodities. A slowdown in China could weigh on global demand and commodity prices.