Experts say the Chinese economy is running out of steam. here’s why

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By Julia Horowitz, CNN Business

It is difficult for American companies to operate in China. But the latest data on the country’s economy highlights why, for many companies, it is still worth it.

What’s Happening: China’s Economic Output increased by 7.9% in the April-June quarter compared to the same period a year ago, China’s National Bureau of Statistics said Thursday.

This growth rate was significantly slower than the 18.3% year-on-year increase that China recorded in the first quarter. But this period has been boosted by comparisons to the depths of the country’s Covid-19 lockdowns in 2020 – and no one expected growth of this magnitude to be sustained.

“Overall, activity in China remained strong in [the second quarter]Said Julian Evans-Pritchard, senior Chinese economist at Capital Economics, in a note to clients.

There are some signs of weakness. Retail sales growth slowed to 12.1% in June, from 12.4% in May, according to data released Thursday. This is the slowest growth rate this year.

“[The] the data continues to point to a patchy recovery, ”said Yue Su, senior economist for The Economist Intelligence Unit.

But overall, 7.9% growth as the recovery solidifies is remarkable and keeps China on track to easily exceed its annual growth target of over 6%.

The statistics are a reminder of why U.S. companies and other multinationals are determined to continue doing business in China despite unpredictable regulations, market access challenges and intellectual property protection challenges.

In his earnings call earlier this month, Levi Strauss said second quarter revenues in China were now 3% higher than the same period in 2019.

“As one of our biggest growth opportunities, we remain focused on sustaining this momentum,” CEO Chip Bergh told analysts.

PepsiCo CEO Ramon Laguarta praised the strength of the company’s business in China during a call with analysts this week, highlighting the strong economic recovery from the Covid crisis.

Tensions between Washington and Beijing and human rights concerns have recently made doing business in China even more difficult for Western companies.

Remember: Earlier this year, companies such as H&M, Nike, Adidas and Burberry facing boycotts because of positions they had taken in the past against the alleged use of forced labor to produce cotton in China’s western Xinjiang region.

But for many, China is simply too great an opportunity to miss, given the size of its consumer base and its continued pace of growth.

Airlines are making money again

US airlines just reported another round of quarterly losses. It could very well be their last.

The latest: Delta Air Lines said on Wednesday that it was profitable in June and expects to be in the dark for the remainder of this year, reports my CNN Business colleague Chris Isidore. United expect to be profitable from this month and are moving forward with expansion plans with their biggest aircraft order in history.

“The momentum continues as we exit June with an accelerating demand environment,” Delta CEO Ed Bastian told analysts this week.

This does not mean that the industry’s problems are over. Delta reported that despite its success in June, revenue for the quarter was about half of the same period in 2019.

And while leisure travel is actually on the rise from pre-pandemic levels, higher-paying business passengers remain scarce. Delta said domestic business travel in June was about 40% of what it was two years earlier. International travel is also still on the mute.

Executives are optimistic that these types of trips will resume after Labor Day, but the pace of the recovery remains an open question.

Investor Perspective: Despite optimism, airline stocks are still lagging behind. Delta stock is up 1% this year, compared to 16.5% for the S&P 500. United stock is up 11%.

But analysts are optimistic. Of 140 ratings given to the eight largest US airline stocks, more than half are “buy” or “hard buy” recommendations. In just 18 cases, analysts are urging investors to sell.

There could be a digital euro by the middle of the decade

The European Central Bank continues its efforts to create a digital version of the euro as the use of cash declines and China speeds up testing of its own electronic yuan.

The central bank on Wednesday announced a two-year investigation that will examine “key issues regarding the design and delivery” of a digital euro and analyze the potential impact on the market. A final decision on whether or not to deploy a digital euro would come later.

Details, details: a digital euro would not replace cash, but would work in much the same way. Instead of paying for goods or services with banknotes, Europeans could use a form of electronic money issued by the European Central Bank or national central banks on a digital wallet.

The announcement puts Europe on track to potentially deploy a digital currency in 2026. It’s an ambitious timeline, but the ECB is clearly concerned about the consequences of waiting too long to act.

In a speech last month, François Villeroy de Galhau, governor of the central bank of France, said central bank money could become marginal as the use of cash declines and new digital coins and tokens emerging. Europe began to look more seriously at a digital euro after Facebook unveiled its plans to create a digital currency in 2019.

Villeroy also highlighted China’s progress in launching a digital yuan, which is already available in a number of Chinese cities.

“The risk is clearly that Europe loses momentum not only in its desire to strengthen the international role of the euro, but even in its preservation,” he said. “The challenge here is also a geopolitical concern. “

Following

BNY Mellon, Morgan Stanley, Truist, US Bancorp and UnitedHealth publish their results before the US markets open. Alcoa and American Outdoor Brands follow after the close.

Also today: Initial US jobless claims for last week at 8:30 a.m. ET. Industrial production data for June follows at 9:15 a.m. ET.

Additionally, Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee at 9:30 a.m. ET.

Coming tomorrow: the latest US retail sales data.

The-CNN-Wire
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