Janus Henderson Investors: Will China be the world’s largest economy in the second quarter of 2020?

It’s difficult to see how the majority of Donald Trump’s voter base will find this palatable when, in their eyes, the blame for the malaise that now washes over the United States can be placed firmly at Beijing’s door. An economic aberration it may be and subsequent quarters will likely see the balance restored, but it will be close and hugely unpopular all the same.

Unpopular it may be but it is now entirely possible following today’s release of China’s second quarter GDP which registered a consensus beating 3.2% increase compared to the same quarter last year. China will be the first major economy to return to growth post Covid-19 but following the weak first quarter, the economy is still 1.6% below where it was a year ago in nominal terms. Even so, this is still an admirable achievement and likely to be markedly better than the US, Europe or the UK which will need a number of years to return to pre-virus levels.

Although the headline numbers beat analyst’s expectation, delving deeper suggests that the recovery still remains lumpy. The government’s focus on infrastructure spending and manufacturing recovery has borne fruit with industrial production rising 4.8% and fixed asset investment seeing an improving trend although still below the levels of last year. Property investment rose 8.4% although manufacturing investments showed no material improvement suggesting that companies are still reluctant to commit capital in these uncertain times.

The real disappointment though, was retail sales, which fell 1.8% and below expectations of a positive number. Most sectors showed improving trends, ex autos, and online sales continued their inextricable rise, growing 25% year on year. Unsurprisingly, catering, tourism and hospitality continued to look weak, although less so than a month earlier while the sales of cosmetics, telecom products and home appliances were 21%, 19% and 10% higher respectively than a year earlier.

The outlook for the second half of 2020 is still unclear but if these trends continue then China is on course to achieve growth in GDP in 2020 and will be one of the very few countries globally to achieve this. The challenge is to switch the engines of growth away from investment towards consumption without stoking the fires of asset bubbles, similar to the post GFC years. With unemployment showing an improving trend and manufacturing back on its feet, policies to entice workers to buy and savers to consume will be needed soon. It is clear from these quarterly numbers that supply is outstripping demand and to avoid over capacity and excess inventory the products being made need to be bought. The government may need to provide incentives for this to be achieved.