China’s economic recovery set to slow further, with ‘worst yet to come’ for both supply and demand

China’s economy likely continued to weaken across the board in October with little signs of bottoming out.

A set of key economic data to be released Monday will be closely studied for signs that the slowdown is serious enough to prompt authorities to step up economic support.

The weakness in the economy is coming from both the supply and demand sides, similar to when the economy was initially hit by the coronavirus in early 2020. 

But the causes of supply shocks have shifted to electricity shortages, Beijing’s environmental curbs and a crackdown on financial risk which has hit the property market, while domestic demand continues to be hit by the Covid-zero strategy. 

The power rationing that started in September likely extended into October, while elevated cost pressures continued to squeeze corporate profits, with both limiting factory output. A higher base for comparison last year might also drive the reading lower. 

Economists expect industrial production to have expanded by 3 per cent from a year ago, the slowest pace since it contracted in early 2020, according to the median estimates in a Bloomberg survey.

A leading subindex in China’s purchasing managers’ index data that measures output also pointed to further softness, falling further into contraction territory in October.

The power crisis is easing for now, with China’s largest grid operator saying this week that supply and demand have returned to balance in around 88 per cent of the country.

However there is still limits on some high-consuming, heavy-polluting industries in selected provinces, and with a cold winter expected and additional supplies of coal limited, there could be further shortages.

Fixed-asset investment in the first 10 months of the year is expected to have slowed to 6.2 per cent from 7.3 per cent in September, according to the survey.

That is mainly as property investment likely continued suffering from tightened financing for developers amid the real-estate market turmoil that began with China Evergrande Group.

Although policymakers have started fine-tuning some property policies and state media reports are fanning speculation of an easing in curbs, the downturn in the sector could still become the biggest drag on growth, economists have said, given that it and related industries accounts for up to 25 per cent of China’s gross domestic product. 

Consumption likely took another hit from new Covid-19 outbreaks and China’s zero-tolerance approach, with restaurants or catering and retail sales in physical stores especially feeling the pain.

Consumer confidence has not picked up to levels seen before the pandemic, as can be seen in the soft national holiday spending data. 

It is also likely some people postponed purchases from October to take advantage of the Singles’ Day online shopping festival in November, which could weaken the reading last month. Economists expect retail sales growth to slow to 3.8 per cent in the month. 

In light of the increasing downward pressures, several economists have lowered their growth forecasts for the coming quarters, including Nomura’s Lu Ting.

“The worst is yet to come,” Lu said. “Despite an alleviated energy shortage and fine-tuning of property curbs, we believe economic conditions are likely to further deteriorate as the pain threshold seems yet to be reached for Beijing to take real actions.”