China’s strong economic rebound continued in the second quarter, as the impact of 2020’s Covid-19 shutdowns receded. GDP expanded by 7.9 percent in Q2, supported by resilient external demand and improving domestic demand. The effects on GDP growth data stemming from comparison with the same periods of last year are becoming less pronounced. In the coming quarters, further growth moderation can be expected, as base effects wear off and give a more realistic picture.
The recovery remains unbalanced, as consumption – although improved – is still not strong enough to balance out any slowdown in investment or exports. Renewed, small scale regional Covid-19 outbreaks are hampering full normalization in retail, and especially services such as transport and tourism. Despite China’s success in containing the pandemic, Covid-19 is still impacting the economy. Future outbreaks and regional lockdowns continue to pose a risk to China’s economic performance.
The aftermath of the pandemic is also intensifying persistent domestic structural problems. Regional disparities in the recovery indicated a growing disconnect between coastal regions and China’s poorer western and northeastern provinces. Furthermore, a skills mismatch is hindering labor market recovery as the manufacturing sector struggles to find workers to meet strong demand, whereas recent graduates’ aspirations lean towards the weaker services sector.