BIG IDEA | China’s industrial production down 10%. Demand resilient.

China’s industrial production troughed -10% in June, reports CreditSuisse in its latest 26-page Global Cycle Notes.

• That’s the lowest growth rate since 1998.

‘Despite this, underlying demand should remain resilient and growth-friendly policies will likely be enacted, which would lead to a momentum upswing in Q3.’

Supply Shocks.

But China is not alone: ‘Global industrial production hit two sharp supply shocks in the early summer.’

• ‘The first was a renewed COVID surge in several countries with low vaccination rate.’
• ‘The second was a further disruption to the automobile industry’s supply chains cause by semiconductor shortages.’
• These supply shocks have driven Creditsuisse’s global estimate to -2.1%, near the lows of the 2019 trade war and the 2012 euro crisis.

The good news: CreditSuisse is ‘forecasting strong immediate industrial production growth due to low inventories and reversing supply shocks.’

• ‘However, the accelerating spread of delta-variant COVID infections in Asian economies continues to pose a significant downside risk.’

And, ‘global semiconductor production appears to have reached its capacity limit, and new production facilities will not come online until 2022.

• So, ‘consumer electronics may also face production delays in Q3, as reported by key firms along the supply chain.

In China, ‘supply shocks have exacerbated slowing demand, and they will continue to limit output growth.’

‘Global chip shortages will weigh on China's manufacturing output in Q3.’

• ‘Auto output contracted in five of the past six months, and only a partial recovery is likely later this year, subject to chip availability.’

‘The spread of COVID has accelerated in multiple coastal and central provinces, raising the risk of more factory disruptions.’

• ‘The more contagious delta variant and the zero-tolerance government policy suggest mobility controls could continue strengthening.’
• ‘In-person services spending will likely contract, weighing on hiring growth.
• ‘However, broad factory shutdowns are unlikely, and they have been avoided since March last year.’

Demand Expanding.

‘Global goods demand expanded in May and remains far above its pre-pandemic trend.

• ‘Global demand for consumer goods stands 5% above its pre-pandemic trend after a surge driven by fiscal support for households and a pandemic rotation toward stay-at-home products.
• The impetus from both of these drivers is now reversing.

In China, ‘underlying demand should remain resilient and growth-friendly policies will likely be enacted, which would lead to a momentum upswing in Q3.’

• Further improvement in labor market conditions is likely as the services economy recovers after the current COVID infection wave.
• However, lower efficacy of domestically manufactured vaccines suggests a slow removal of behavioral restrictions.

‘Demand for housing appears to have slowed.’

• ‘The risk of substantial weakness that poses a major risk to overall economic growth has risen.’
• ‘Net new mortgage borrowing declined to the lowest level since last spring, and building sales have plateaued.’
• ‘New purchase restrictions and the expectation of future property taxes have limited home purchases for investment purposes.’
• ‘Leverage restrictions for home builders have reduced construction and caused credit standards to tighten for the sector.’

‘Foreign goods demand growth will likely slow, weighing on Chinese export growth.

• ‘However, a prolonged decline in exports is unlikely due to robust economic fundamentals among China's developed trade partners.’

‘The government policy stance has slightly shifted toward supporting growth.’

• ‘Spending on public construction projects will accelerate in the second half, and the possibility of further monetary easing has considerably risen.’