GDP growth slowed to 0.4 percent year-on-year in the second quarter of 2022, from 4.8 percent year-on-year in the first quarter. Yet the economy managed to avoid a contraction, despite the strict anti-pandemic measures, including lockdowns, to contain the sporadic Covid-19 outbreaks in many places in the country in April and May. Our (Standard Chartered) calculations show China’s economic output gap widened to-4.0 percent in the second quarter from-0.5 percent in the first quarter. Monthly data point to a continued economic recovery in June, as China eased Covid-19 restrictions due to declining new infections from May. Industrial production growth rebounded to 3.9 percent year-on-year in June from-2.9 percent year-on-year in April and 0.7 percent year-on-year in May, although the pace remained slower than 7.5 percent in JanuaryFebruary.

Fixed-asset investment growth improved to 5.8 percent year-on-year in June from 4.7 percent in May, led by a recovery in infrastructure investment (8.2 percent year-on-year versus 7.2 percent in May) and manufacturing investment growth (9.9 percent versus 7.1 percent prior). Also, the impact of pandemic prevention and control measures on the services and retail sectors eased as well, with their growth rates recovering to 1.3 percent year-on-year and 3.1 percent year-onyear, respectively, in June (from-5.1 percent and-6.7 percent in May). Looking ahead, we expect China’s economy to improve further in the run-up to the 20th National Congress of the Communist Party of China on increased stimulus and less disruptive anti-pandemic policies.

We expect GDP growth of 5.3 percent year-on-year in the third quarter and 5.9 percent year-on-year in the fourth quarter, and maintain our call of no more changes to the mediumterm lending facility (MLF) rate or the reserve requirement ratio (RRR) until the end of 2023. While this year got off to a betterthan-expected start, China’s economy stumbled in the second quarter due to new sporadic Covid-19 outbreaks, domestic housing sector concerns, and global repercussions from the Russia-Ukraine conflict. The economic slowdown particularly affected the youth labor market in the second quarter. According to official data, the youth (in the 16-24 age group) unemployment rate rose to 19.3 percent in June, despite an improvement in employment conditions for the 25-59 age group for a second month (with their unemployment rate declining from 5.3 percent in April to 4.5 percent in June).

We expect pressure on the youth labor market to rise further in July and August, with more than 10 million new college graduates about to enter the job market.Urban household income and consumption expenditure were also hit in the second quarter. In nominal terms, urban household disposable income growth slowed to 1.5 percent year-onyear in the second quarter from 5.4 percent year-on-year in the first quarter and average growth of 5.8 percent in 2020-21.