China’s Q1 GDP growth surprised markedly on the upside. This was especially true for growth dynamics which came in at 1,3% qoq 4,8% yoy, just 0,2 pp below the previous result. The reading was more than twice as high as the Reuters consensus forecast 0.6% qoq, and thus greeted with some skepticism.
The data contrasted with March retail sales which dropped by 3.5 yoy (after 6. 7% yoy in February). Positive growth contributions came from exports, industrial production and urban investment Infra structure investment improved but real estate data showed strong Covid scars.
Real activity data we have seen in April have deteriorate strongly. Shanghai’s lockdown is only one example of various forms of restrictions across 43 other cities. Fears are flickering that Beijing might be next. The lockdowns imply a heavy dropping of retail sales. Experience from 2020 suggests long delays for its recovery. Production might have held up better as partially organised in closed “. Logistics are also under strains in ports but also on surface. This will also stress international supply chains and have a negative impact on inflation in Western countries.
Visibility on the growth outlook is currently very low. Much depends on the Covid lockdown policy (we expect it to be modified after the current outbreak) and the further spread of the virus. Moreover, officials continue to see growth at about 5% in order not to deviate too much from the NPC target. Missing the 5.5% by a wide margin could be embarrassing for President Xi. This implies intensifying policy efforts in H2 2022. The PBoC cut its RRR by 25 bps but left policy rates unchanged. Recently, “window guidance” was more stressed than rate cuts, not least in order not to widen the interest spread to US rates. We still see a reduction in the MLF rate by 10 bps. We revised our 2022 growth outlook to 4.0% to incorporate the Q1 result, but otherwise see GDP under severe pressure.