China’s economy slows significantly in the second quarter

China’s economic growth slowed well below expectations in the second quarter, impacted by the recent Covid restrictions in some regions of the country that hurt industrial activity, while the war in Ukraine and global supply shortages added pressure.

The economy expanded by 0.4% in Q2, compared to 4.8% growth in the previous three-month period and also strongly missed forecast for 1% growth the worst result since the record started in 1992, excluding the Q1 2020 sharp contraction, caused by pandemic total lockdowns.

Quarterly figure showed that China’s economy contracted by 2.6% in Q2 from the previous quarter and also missed forecast for 1.5% drop.

China’s economic activity was also affected by darkening global outlook, in light of soaring inflation that lifted prices of fuel, electricity and food and strongly hits production as well as households, through sharply rising cost of living, boosting fears that many big economies are heading towards recession.

Despite weak figures, economists show a cautious optimism, as the economic activity started to pick up in June on receding Covid restrictions, suggesting the worst is likely over that sidelines fears of the economy sliding into recession.

On the other side, the government needs to support fragile growth by deploying new stimulus measures but is concerned about the negative effects as the China’s central bank would need to cut interest rates and try to keep inflation at currently relative low levels.

Consumer prices also rose in China but is not as hot as in other major economies that leaves more space to the central bank, however, policymakers must be cautious about potential capital outflows, as most of other major central banks, led by the US Federal Reserve, aggressively raise interest rates to combat high inflation.

Economists expect that China is going to face very tough task in achieving its official growth target for 2022 at 5.5%, with current zero tolerance Covid strategy, suggesting that growth is likely to slow to 4% this year.