The sporadic COVID-19 outbreaks in early January did not slow the pace of China’s growth, as production and consumption indicators came out better than market expectations. Industrial production continued to accelerate while domestic and external demand steadily improved, suggesting that output expansion was firmly supported by rising demand. Strong fixed asset investment signals strengthened business confidence and will fuel future production. Although some other indicators such as the manufacturing PMI and the jobless rate indicated a softening recovery, we expect them to be transitory and unlikely to alter the strong growth trend in the near term.
The nationwide lockdown early last year halted nonessential activities, causing deep dips in many economic indicators. To eliminate the impact of the low base, we compare the latest data with the same period in 2019 and look at the two-year growth rate.
China’s industrial production in the first two months was up by 16.9% from 2019, translating into an 8.1% average annual increase, which was well above the average year-on-year growth rate before the pandemic. High-tech manufacturing grew by more than 27% over the two years. This reflects the surging external demand for pharmaceutical and remote-working equipment from countries under prolonged lockdowns, as well as the government’s push to move up the manufacturing ladder to achieve technological self-reliance.
The above-pre-pandemic output level was mostly buttressed by exports, as domestic consumption hasn’t gotten back on track. China’s retail sales rose by 6.4% compared with the same period in 2019, equivalent to a 3.2% yearly gain, far below the 8% pre-pandemic growth. Urban consumption showed more resilience than rural because of the proliferation of e-commerce through which goods sales jumped by 34% over the past two years. This suggests huge potential in China’s consumer market, and the government may fully unleash domestic demand by facilitating the extension of e-commerce and delivery services to rural areas. This would help toward enhancing domestic circulation as well as achieving the government’s rural revitalization goal.
Despite the steady improvement in production and goods consumption, the labor market continued to limp, as the jobless rate climbed to 5.5% in February from 5.2% in December. The slowdown in manufacturing and construction during the holiday season likely contributed, consistent with the moderating manufacturing and construction PMI readings for February. Structural mismatch in the labor market persisted, as job opportunities in the service sector remain limited while manufacturers struggle to find factory workers. Managers are pushing back hiring decisions as surging input prices and labor costs squeeze profits. Though unemployment will ease as businesses ramp up production to meet rising demand in the coming month, further job creation must rely on services' revival, especially for the 9 million college graduates.
China’s recovery is expected to continue benefiting from the global rebound this year. Stable external demand remains crucial for supporting growth of industrial production in the near term. As domestic consumption gains pace, it’s likely to become the key driver in the second half of the year. To achieve that, labor market and income stability is a prerequisite, and that relies on the recovery of services and vaccination progress. Policy support, especially for small and medium-size firms, is also critical to a persistent and balanced expansion through the year.